United States District Court, Southern District of New York
April 16, 2002
DEBORAH DONOGHUE, AS EXECUTRIX OF THE ESTATE OF RICHARD MORALES, DECEASED, PLAINTIFF,
NATURAL MICROSYSTEMS CORP. AND RONALD BLEAKNEY, DEFENDANTS.
The opinion of the court was delivered by: Robert W. Sweet, United States District Judge
Deborah Donoghue ("Donoghue"), as executrix of the estate of Richard
Morales ("Morales"), has moved for summary judgment under Rule 56, Fed.
R. Civ. P., granting the relief sought by her complaint, the recovery of
short — swing profits arising out of the purchase and sale of
shares of Natural Microsystems Corp. ("NMC") by defendant Ronald Bleakney
("Bleakney"), a former officer of NMC, appearing pro se. Upon the facts
and conclusions set forth below, the motion is granted, and judgment will
be entered in accordance with this opinion.
Donoghue filed her complaint in this action on January 29, 2001,
pursuant to Section 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), which provides for an issuer's recovery from an officer
of "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 . . . ."
15 U.S.C. § 78p(b).
Donoghue's motion for summary judgment was heard and marked submitted
on January 16, 2002.
The facts as set forth in the Local Rule 56.1 Statement and the
submissions of Bleakney are undisputed.
The common shares of NMC were registered under Section 12(g) of the
Exchange Act, 15 U.S.C. § 78l(g).
Prior to March 15, 1999, Bleakney was Senior Vice President for Sales
at NMC, and was responsible for directing sales activities for NMC in
North America, South America, and Europe. On that day he tendered his
resignation. He continued to bear the title of "Senior Vice President For
Sales" at NMC, but the resignation was effectively accepted on March 22,
1999, after which time he had few or no substantive duties commensurate
with the title.
Bleakney made the following purchases of NMC common stock on the
dates, in the quantities, and at the prices, here shown:
Date No. of Shares Price
10/30/98 400 $7.6235/Share
4/19/99 3,000 $4.1250/Share
4/19/99 2,000 $4.2500/Share
4/19/99 3,000 $4.2500/Share
4/20/99 2,000 $4.0625/Share
4/22/99 9,917 $4.0938/Share
4/30/99 400 $4.1569/Share
Bleakney made the following sales of NMC common stock on
the dates, in the quantities, and at the prices, shown:
Date No. of Shares Price
11/09/98 4,463 $11.8750/Share
11/09/98 1,000 $12.1250/Share
11/09/98 2,000 $12.000/Share
11/09/98 125 $11.8750/Share
NMC provided some guidance to employees concerning all
executive/insider stock trading activities and guidelines in regard to
rules and regulations of insider trading, including but not limited to
Section 16(b). In Bleakney's dealings, including the transactions of
April 20, 1999 and April 22, 1999, the issue of Sale and Purchase as
relates to Section 16(b) was never raised. Bleakney relied upon the
company's advice and believed his transactions to be in accordance with
Section 16(b) rules and regulations, as further evidenced by the
production of Form 4 by NMC agents and appropriate approval on such forms
by NMC legal counsel.
On November 1, 2000, NMC made demand upon Bleakney for the payment to
it of the short-swing profits which this suit seeks to recover.
Morales was a shareholder of NMC at the time of the filing of this
suit, and upon his death and her qualification as executrix of his
estate, and solely by operation of law, Donoghue became a shareholder of
Bleakney claims he paid $111,988 to NMC for the shares sold on November
9, 1998 for approximately $92,004, resulting in a net personal loss of
$19,984. The purchases of April 20, 1999 and April 22, 1999 were not sold
for more than a year after such purchase.
Based on the advice received from NMC, Bleakney believed that Section
16(b) was violated only by a purchase and sale realizing profit within a
six month period.
I. The Standard for Summary Judgment
Summary judgment is appropriate "if the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a
matter of law." Fed.R.Civ.P. 56(c). In assessing a summary judgment
motion, the court should credit the evidenco of the nonmoving party,
draw all reasonable inferences in that party's favor. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986). If, when viewing the evidence
produced in the light most favorable to the nonmovant, there is no genuine
issue of material fact, then the entry of summary judgment is
appropriate. See Burrell v. City Univ., 894 F. Supp. 750, 758 (S.D.N.Y.
1995) (citing Binder v. Long Island Lighting Co., 933 F.2d 187, 191 (2d
II. The Elements of a Violation of Section 16(b) Have Been Established
Section 16(b) of the Exchange Acts precludes corporate insiders from
making short-swing profits from transactions in the corporation s stock.
It provides, in relevant part:
For the purpose of preventing the unfair use of
information which may have been obtained by such.
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 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 . . . officer in
entering into such transaction of holding the
security purchased or of not repurchasing the
security sold for a period exceeding six months.
15 U.S.C. § 78p(b). "The statute requires disgorgement to the company
of any profit derived from the matching of any purchase and any sale of
an `equity security' . . . within a six-month period by a statutory
insider, irrespective of intent or whether overall trading during that
six months (i.e., all sales and purchases combined) resulted in a loss."
Gwozdzinsky v. Zell/Chilmark Fund, L.P., 136 F.3d 305, 308 (2d Cir.
1998). For the statute to apply, it is not necessary to show any actual
misuse of inside information or of any unlawful intent. Feder v. Frost,
220 F.3d 29
, 32 (2d Cir. 2000) (citing Magma Power Co. v. Dow Chem. Co.,
136 F.3d 316
, 320 (2d Cir. 1998)). "Rather, Section 16(b) operates
mechanically, and . . . imposes liability without fault . . . within its
narrowly drawn limits." Feder, 220 F.3d at 32 (internal quotations and
Here, facts demonstrate that a short-swing trading violation has
occurred as a matter of law. Bleakney was a Senior Vice President with
significant responsibilities in November of 1998, when he sold the shares
at issue, and in October 1998, when he purchased 400 shares. In April
1999, when he purchased the bulk of shares at issue, he continued to hold
that position. To the extent Bleakney's duties as an officer may have
been reassigned or limited after his resignation on March 22, 1999, his
actions after that date still fall within the scope of Section 16(b), for
all of the sales sought to be matched with subsequent purchases
indisputably occurred prior to the resignation. See Arrow Distrib. Corp.
v. Baumgartner, 783 F.2d 1274, 1279 (5th Cir. 1986); Feder v. Martin
Marietta Corp., 406 F.2d 260, 266-69 (2d Cir. 1969); see also Lewis v.
Varnes, 505 F.2d 785, 789 (2d Cir. 1974) ("Section 16(b), in referring
to purchases or sales by directors or officers, clearly relates to
transactions in which at least one end (the purchase or sale) occurred
while the director or officer held office."); Lewis v. Bradley,
599 F. Supp. 327, 329 (S.D.N.Y. 1984) (acknowledging that "liability must
attach" if sale occurred prior to resignation and purchase occurred after
resignation, but finding no liability since both transactions had
occurred subsequent to resignation).
The sales and purchases were within six months of one another, and the
first announced in Smolowe v. Delendo Corp., 136 F.2d 231,
237 (2d Cir. 1943), cert. denied, 320 U.S. 751 (1943), remains in effect
as to the matching of transactions. As articulated by the Honorable
Learned Hand in Gratz v. Claughton, 187 F.2d 46 (2d Cir. 1951), cert.
denied 341 U.S. 920 (1951).
If one is seeking an equation of purchase and sale,
one may take any sale as the minuend and look back
for six months for a purchase at less price to match
against it. On the other hand, if one is looking for
an equation of sale and purchase, one may take the
same sale and look forward for six months for any
purchase at a lower price. Although obviously no
transaction can figure in more than one equation,
with that exception we can see no escape from what
we have just said. It is true that this means that
no director, officer, or "beneficial owner" may
safely buy and sell, or sell and buy, shares of
stock in the company except at intervals of six
months. Whether that is too drastic a means of
meeting the evil, we have not to decide; it is
enough that we can find no other way to administer
Id. at 52. See also Morales v. New Valley Corp., 999 F. Supp. 470,
476 (S.D.N.Y. 1998) (citing Mayer v. Chesapeake Ins. Co., 877 F.2d 1154
1164 (2d Cir. 1989).
Bleakney has urged an in pari delicto defense, arguing that NMC
provided guidance to its employees concerning executive and insider stock
transactions but did not caution him as to potential liability under
Section 16(b). However, this and other such equitable defenses are
generally not available in actions under Section 16(b). See Roth v. Fund
of Funds, Ltd., 405 F.2d 421, 422-23 (2d Cir. 1968), cert. denied,
394 U.S. 975, 89 S.Ct. 1469, 22 L.Ed.2d 754 (1969); see also Texas Int'l
Airlines v. Nat'l Airlines, Inc., 714 F.2d 533, 536 (5th Cir. 1983) ("The
case law uniformly rejects equitable defenses in section 16(b) cases.")
(citing Roth, 405 F.2d at 422-23; Magida v. Cont'l Can Co., 231 F.2d 843,
846 (2d Cir.), cert. denied, 351 U.S. 972, 76 S.Ct. 1031, 100 L.Ed. 1490
(1956); Tyco Laboratories, Inc. v. Cutler-Hammer, Inc., 490 F. Supp. 1, 8
(S.D.N.Y. 1980); Cutler-Hammer, Inc. v. Leeds & Northrup Co.,
469 F. Supp. 1021, 1023 (E.D.Wis. 1979)). In fact, equitable defenses
have been rejected in this Circuit even where the issuer participated in
the transaction and where a transaction occurred at the incentive of the
issuer. See Roth, 405 F.2d at 422-23; Magida, 231 F.2d at 846. Bleakney's
claim that he should not be liable because of NMC's omissions is
Bleakney has also sought to invoke the "unorthodox transaction"
doctrine. This defense refers to a relatively narrow exception in Section
16(b) cases in which courts, applying a pragmatic approach in imposing
Section 16(b) liability, consider the insider's opportunity for
speculative abuse. See Kern County Land Co. v. Occidental Petroleum
Corp., 411 U.S. 582, 595 (1973).
In applying the "unorthodox transaction" doctrine, courts have weighed
factors such as (i) whether the transaction involved a purchase of stock
for cash; (ii) whether the insider had access to inside information
regarding the transaction; and (iii) whether the insider lacked control
over the timing and circumstances of the transaction. See, e.g., Kern
County, 411 U.S. at 595; Colan v. Mesa Petroleum Co., 951 F.2d 1512,
1523-24 (9th Cir. 1991), cert. denied, 112 S.Ct. 1943 (1992); Texas Int'l
Airlines, 714 F.2d at 539; Morales v. Gould Investors Trust,
445 F. Supp. 1144, 1149 (S.D.N.Y. 1977); Makofsky v. Ultra
Dynamics Corp., 383 F. Supp. 631, 640 (S.D.N.Y. 1974).
The only unorthodox aspect of the transactions in this case was the
ignorance c)f both NMC and Bleakney. Bleakney purchased and sold at times
of his own choosing. He was not entrapped by a merger or similarly
imposed surrender or acquisition of shares into an involuntary premature
matching transaction. There is no basis in fact or law for treating
Bleakney's action as implicating the "unorthodox transactions" doctrine.
The Calculation of Damages
It is of no consequence for Section 16(b) purposes that Bleakney's
transactions, in the aggregate, resulted in a net loss. See Makofsky,
383 F. Supp. at 638-39. Under the applicable authorities listed above, see
e.g., Gratz, 187 F.2d at 52; Smolowe, 136 F.2d at 237, Bleakney's profits
are computed from the record using the "Lowest-In, Highest-Out" method,
arbitrarily matching his highest — priced sales transactions with
the lowest priced purchases containing the same number of shares:
Date No. of Shares x Price
(1) 11/09/98 1,000 x $12.125/Share = $12,125.00
(2) 11/09/98 1,000 (of 2,000) x $12.000/Share = $12,000.00
(3) 11/09/98 1,000 (of 2,000) x $12.000/Share = $12,000.00
(4) 11/09/98 4,463 x $11.875/Share = $52,998.13
(5) 11/09/98 125 x $11.875/Share = $1,484.38
Total = $90,607.51
Date No. of Shares x Price
(1) 4/20/99 1,000 (of 2,000) x $4.0625/Share = $4,062.50
(2) 4/20/99 1,000 (of 2,000) x $4.0625/Share = $4,062.50
(3) 4/22/98 1,000 (of 9,917) x $4.0938/Share = $4,093.80
(4) 4/22/98 4,463 (of 9,917) x $4.0938/Share = $18,270.63
(5) 4/22/98 125 (of 9,917) x $4.0938/Share = $511.73
Total = $31,001.16
Under this method, subtracting the total spent on purchases,
$31,001.16, from the total gained in sales, $90,607.51, yields $59,606.35
as the total amount recoverable by the issuer.
Although his in pari delicto defense is unavailing, Bleakney has
established that imposition of prejudgment interest in this instance
would be inequitable. See Morales v. Freund, 163 F.3d 763, 767 (2d Cir.
1999) ("[T]he question of whether such interest should be given in a
particular case is within the discretion of the trial court.") (citing
Whittaker v. Whittaker Corp., 639 F.2d 516, 533 (9th Cir. 1981), cert.
denied, 454 U.S. 1031, 102 S.Ct. 566, 70 L.Ed.2d 473 (1981)). The record
has not established the result of any sales of NMC stock after the April
1999 purchases and the equitable considerations here stem from the
inadequate advice rendered to Bleakney by NMC.
For the foregoing reasons, the motion for summary judgment is granted.
Settle judgment on notice with costs awarded to Donoghue.
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