The opinion of the court was delivered by: POLLACK
THE COURT: This suit seeks a recovery from a former stockholder of Lane Bryant, Inc. pursuant to Section 16(b) of the Securities and Exchange Act of 1934 on the ground that the defendant during a period of less than six months, and while the beneficial owner of more than 10 percent of the equity common stock of the corporation, realized profits through the purchase and sale of the corporate plaintiff's securities. This Court has jurisdiction over the suit pursuant to Section 27 of the Exchange Act, 15 U.S.C. Section 78aa. For the reasons indicated hereafter, the plaintiff corporation is entitled to recover from the defendant.
The plaintiff Lane Bryant, Inc., ("Lane Bryant") is a Delaware corporation with its principal place of business in New York City. Its common stock is registered with the Securities and Exchange Commission. Pursuant to Section 12(g) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78l and its common stock is traded on the New York Stock Exchange.
The defendant is a corporation organized and existing under the laws of the Province of Ontario, Canada, with its principal place of business in Ontario, Canada. At the times relevant herein the defendant was an investment holding company whose subsidiaries were engaged in a variety of businesses, including racetracks, restaurants, and natural gas production and distribution. The defendant's purchases and sales to be described herein were made by use of the means and instrumentalities of interstate commerce and by use of the mails and some of the purchases were made through the facilities of the New York Stock Exchange in the Southern District of New York.
The defendant's purchases of the shares of Lane Bryant common stock commenced on December 6, 1979. By March, 1980, it had become the beneficial owner of 472,700 shares of Lane Bryant common stock, an amount in excess of 10 percent of the outstanding shares of Lane Bryant common stock. Thereafter, and at all times from March 26, 1980 until February 13, 1981, the defendant was the beneficial owner of more than 10 percent of Lane Bryant common stock.
During the 6-month period from August 15, 1980 to February 13, 1980, the defendant purchased 160,100 shares of Lane Bryant common stock at a total purchase price, including brokerage commissions of $ 3,032,612.50. On February 13, 1981, Lane Bryant and the defendant entered into an agreement pursuant to which the defendant sold all of its Lane Bryant stock to Lane Bryant, consisting of 700,900 shares for an aggregate purchase price of $ 16,120,700, or $ 23 per share. (U.S. dollars.) The sales agreement expressly stated that Lane Bryant reserved any and all rights to bring any action that may exist under Section 16(b) of the Securities Exchange Act of 1934, as amended. The agreement cautioned that nothing contained therein should be deemed to be an acknowledgment that Lane Bryant has a valid claim under Section 16(b).
Within 5 days of the date of sale, Lane Bryant filed the complaint herein to recover alleged short swing profits from the defendant on the common stock of Lane Bryant. The complaint was served on February 23, 1981, and an answer denying liability was filed on March 18, 1981.
In March, 1980 Lane Bryant brought an action in this court against the defendant and others, seeking to enjoin the defendant from purchasing or voting any Lane Bryant common stock and to require the defendant to divest itself of its Lane Bryant holdings. In October, 1980, the defendant requested representation on Lane Bryant's board of directors, which was refused, and Lane Bryant proposed that the defendant sell its Lane Bryant holdings to Lane Bryant at a premium.
In November, 1980, the defendant requested from Lane Bryant a list of Lane Bryant's stockholders. Lane Bryant refused that request and the defendant commenced a proceeding in the Delaware Chancery Court to obtain such a list and its application therefor was granted on February 12, 1981. The defendant filed an appropriate form with the SEC reflecting its intention to engage in a proxy contest with Lane Bryant management, and Lane Bryant continued to indicate that it would resist, and in fact increased its indebtedness in order to redeem part of its outstanding common shares.
In the face of this opposition the defendant decided to discontinue its contest for control, and on February 13, 1981, entered into the agreement mentioned above with Lane Bryant.
The statute expressly provides, "every person who is directly or indirectly the beneficial owner of more than 10 percentum of any class of any equity security (other than an exempted security) which is registered pursuant to Section 12 ... is subject to the liabilities set forth in Section 16(b) of the Act," which reads "for the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner ... 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 6 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 ... in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months." Plaintiff alleges herein that during the six month period prior to the sale of the stock on February 13, 1981 the defendant purchased 160,100 shares of Lane Bryant upon which it subsequently realized short-swing profits of 649,687.50. The statute and the cases have made clear that such profit may be recovered by the issuer, in this case Lane Bryant, regardless of the intention of the beneficial owner in entering into the transaction. While the purpose of the law was to prevent the unfair use of information which may have been obtained by insiders, the liability of an insider for short-swing profits is not dependent on proved or actual use of inside information. If there is a short-swing profit by an insider and the transaction is not within any of the exceptions set forth by the Securities and Exchange Commission in its regulations pursuant to the Act, liability is imposed regardless of good faith. None of the exceptions provided with respect to a purchase and sale of corporate securities by insiders apply to the transactions in this suit (see 17 CFR Section 240.16 et seq.)
The defendant urges this court to reject the so-called "objective standard" whereby a beneficial owner of more than 10 percent of any class of equity security is automatically liable for short-swing profits made on the purchase and sale or sale and purchase of such securities within a period of less than 6 months. Instead, relying on Kern County Land Co. v. Occidental Petroleum Corporation, 411 U.S. 582, 93 S. Ct. 1736, 36 L. Ed. 2d 503 (1973) defendant suggests that this Court should adopt towards the defendant's transactions, the "pragmatic approach." Under this approach, the defendant argues that it would not be liable because it had no access to inside information, and hence there was no possibility of the speculative abuse against which Section 16(b) was directed.
The "objective standard" for Section 16(b) liability was set out in Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943).
"The Congressional hearings indicate that Section 16(b), specifically, was designed to protect the "outside' stockholders against at least short-swing speculation by insiders with advance information. It is apparent too, from the language of Section 16(b) itself, as well as from the Congressional hearing, that the only remedy which its framers deemed effective ...