Appeal from a Judgment of the United States District Court for the Southern District of New York, Abraham D. Sofaer, Judge, Dismissing Complaint Under 15 U.S.C. § 78p(b) on the Ground that Defendant was a Market Maker Exempt From Liability Under 15 U.S.C. § 78p(d).
Newman and Kearse, Circuit Judges, and Tenney, District Judge.*fn*
Plaintiff C.R.A. Realty Corporation ("CRA"), a shareholder of the nominal defendant Tri-South Investments ("TSI"), appeals from a final judgment of the United States District Court for the Southern District of New York, Abraham D. Sofaer, Judge, dismissing its complaint against defendant Drexel Burnham Lambert, Inc. ("Drexel"), which sought to recover amounts allegedly due TSI pursuant to § 16(b) of the Securities Exchange Act of 1934 ("1934 Act" or "Act"), 15 U.S.C. § 78p(b) (1982), on account of Drexel's short-swing trading in TSI securities while Drexel was the beneficial owner of more than ten percent of TSI's common stock. The district court granted Drexel's motion for summary judgment dismissing the complaint on the ground that Drexel was a market maker in TSI securities and hence was exempted by § 16(d) of the 1934 Act, 15 U.S.C. § 78p(d) (1982), from liability for short-swing profits under § 16(b). On appeal, CRA contends that the exemption provided by § 16(d) is inapplicable as a matter of law because Drexel enjoyed short-swing profits in TSI's common stock but at most was market maker only in its convertible debentures, and that even if the exemption were applicable in theory, the court should not have granted summary judgment since genuine issues of fact exist. We disagree with both contentions and affirm the judgment of the district court.
A. The Events and the Complaint
The lawsuit focuses on trading by Drexel in securities of TSI during the period from June 5, 1979, to November 11, 1981. Most of the facts are undisputed. TSI had three classes of securities, each listed and traded on a national securities exchange: a common stock, a 7% convertible subordinated debenture, and a 10% convertible debenture. The debtentures were convertible at the option of their holders into shares of TSI common stock without the payment of additional consideration.
Drexel, a broker-dealer in securities, owned more than 10% of TSI's common stock. During at least part of the period in question, Drexel held itself out to be a market maker in TSI's convertible debentures. It was not a market maker in TSI common stock. Within each class of TSI securities, between June 1979 and November 1981, Drexel made purchases and sales, or sales and purchases, within periods of less than six months ("short-swing" transactions). CRA instituted the present action as a shareholder of TSI, contending that, under § 16(b) of the 1934 Act, TSI was entitled to recover Drexel's profits from its short-swing transactions.
Following a period of discovery, Drexel moved for summary judgment on the ground, inter alia, that it was a market make in TSI debentures, and that § 16(d) of the 1934 Act therefore exempted all of its transactions in TSI securities from the scope of § 16(b). CRA opposed the motion, contending that Drexel had not consistently been a market maker in the convertible securities during the period in question. It presented affidavit evidence that Drexel had listed itself in an inter-dealer quotation service published daily by The National Quotation Bureau, and known informally as the "Yellow Sheets," as a market maker in the convertible debentures only on certain dates and not on others. CRA contended that the sporadic character of Drexel's listings and transactions contradicted its claim to status as a market maker, and that its short-swing transactions in the debentures were thus not exempted by § 16(d). Further, it contended that even if Drexel had been a market maker in the debentures, none of Drexel's transactions in TSI common stock were exempted by § 16(d) since Drexel was at no pertinent time a market maker in that stock. CRA cross-moved for summary judgment in its favor.
In opposition to CRA's cross-motion and in further support of its own motion, Drexel presented affidavits of two of its employees and of four independent broker-dealers, stating that, notwithstanding the Yellow Sheets, Drexel had in fact at all pertinent times held itself out to other dealers as willing to buy and sell TSI convertible debentures for its own account at reasonable prices on a regular and continuous basis. Drexel states that its transactions in TSI common stock were incident to and in connection with its market-making activities in the convertible securities, because there was a necessary relationship between the common stock and the 10% convertible debentures, in that the two securities traded in step with each other and at roughly equivalent prices.
B. The Decision of the District Court
The district court, in an opinion dated August 17, 1983, and reported at 568 F. Supp. 1190, granted Drexel's motion for summary judgment and dismissed the complaint. The court ruled that the affidavits presented by Drexel were sufficient to establish that Drexel had been a market maker in TSI debentures throughout the pertinent period, and that CRA's evidence as to the gaps in the Yellow Sheets did not create an issue of material fact. Hence, § 16(d) exempted Drexel's transactions in TSI debentures from § 16(b)'s provisions.
With respect to Drexel's trading in TSI common stock, the court noted that there were neither any regulations promulgated by the Securities and Exchange Commission ("SEC" or "Commission") nor any reported judicial decisions interpreting the applicability of § 16(d)'s market-maker exception to the situation where the short-swing transaction occurred in one class of security and the market making was performed in another. The court observed that the literal language of § 16(d) exempted from § 16(b) only transactions in a security that are incident to market making in the same security. Nevertheless, recognizing that § 16(b) exposes those covered by its terms to harsh liability without fault, and that § 16(d) is a "broad exception to § 16(b), designed to avoid hampering bona-fide, market-making activity with the threat of no-fault liability for 'short swing profits," 568 F. Supp. at 1193, the court concluded that § 16(d) should be read liberally in order best to effectuate its purposes. It noted that Drexel's unrebutted affidavits demonstrated that there was a necessary relationship between transactions in TSI common stock and TSI 10% convertible debentures, in that the debentures generally traded at a price that reflected and was roughly equivalent to the price of TSI common stock. The court concluded that "a common-sense ...