BLAU v. LEHMAN
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
Argument of Morris J. Levy
Chief Justice Earl Warren: Number 66, Isadore Blau, etc., Petitioner, versus Robert Lehman et al.
Mr. Morris J. Levy: Mr. Chief Justice and may it please the Court.
This matter is presently before this Court pursuant to its order which granted petitioner's application for writ of certiorari to review the judgment of the Circuit Court of Appeals for the Second Circuit which affirmed, by divided Court, the trial court judgment, dismissing the complaint as to the respondents, Lehman Brothers, and affirming the judgment as against the respondents Thomas.
The action was originally commenced by the petitioner, a stockholder of Tide Water Associated Oil Company, on its behalf, to recover short-swing profits realized by Lehman Brothers from its transactions in the stock of Tide Water.
This action was brought pursuant to Section 16 (b) of the Securities Exchange Act of 1934 which, in substance, provides that, for the purpose of preventing the unfair use of information which may have been obtained by a director, an officer, or a 10% stockholder, any profit realized by such person shall be recoverable by the issuer or if the issuer fails to sue by a stockholder who brings such action on its behalf.
Pursuant to the man upon Tide Water and its failure to commence such suit, the petitioner as a stockholder did commence such suit.
Now, the issue involved here is the interpretation to be given to Section 16 (b), whether or not the Congressional purpose expressly stated by Congress should be carried out or whether the literal language of the statute should be followed.
Another issue involved here is whether or not the Securities and Exchange Commission has the power to formulate and make rules which Congress specifically allowed it to make and what effect the Court should give to such rules in interpreting the purpose of Section 16 (b).
Now, before going into the facts of the case, I think it would be advisable to go into the history of the Securities Exchange Act of 1934.
Your Honors will recall that, in 1929, there was a stock market crash and which vividly brought to the attention of Congress the fact that there was looseness in National Stock Exchanges, there were manipulations by insiders, and there were gen -- the general makeup of the market and the sale and purchase of securities were such as to put the investors generally in a very bad position as compared to the persons who are in the inside of the corporation.
Extended hearings were held before the Congressional committees and, pursuant to such hearings, Congress decided to enact the Securities Exchange Act of 1934 and its general purpose was to protect the investors to prohibit market manipulation and to maintain fair and free markets so that investors throughout the country might go into the market and purchase or sell securities knowing that there are no inside manipulations which cause the prices to go up or down.
Now, closely alike to this general purpose for the enactment of Section 6 -- the enactment of the Securities Exchange Act of 1934 was the furnishing of reports by insiders.
Congress found that insiders had used their confidential knowledge of the corporation to manipulate stock, to purchase stock, to sell stock based upon such knowledge and that the investors were at a great disadvantage because of that.
So, Congress decided to require these insiders such as officers, directors, and principal stockholders who could have use of such inside information and who are in such a position to get it to furnish reports of their purchases or sales of stock.
And, in order to deter them from making use of confidential information, they inaugurated a plan whereby if the director or officer or principal stockholder purchased and sold a security of an issuer which was listed upon the National Security Exchange, if such transaction occurred within a period of less than six months, this -- the profit realized by such insider was recoverable from him regardless of his intention -- as stated in the Section, regardless of his intention of rep -- of not repurchasing the securities sold or of not selling the securities purchased within a period of six months.
Justice Potter Stewart: Mr. Levy.
Mr. Morris J. Levy: Yes, sir?
Justice Potter Stewart: This legislation did not apply to insiders such as directors, officers, and majority stockholders, did it?
It applied specifically and expressly and exclusively to directors, officers, and stockholders who held 10% or more of the equities -- securities, isn't that correct?
Mr. Morris J. Levy: The statute, as finally enacted, did state that it applied only to directors.
It didn't state the word “only.”
It actually stated, for the purpose of preventing the use of unfair information, any purchase or sale by a director, an officer, or 10% stockholder.
It should be --
Justice Potter Stewart: So it didn't say insider such as these people?
Mr. Morris J. Levy: No, it did not.
Justice Potter Stewart: That's -- I just -- you told us that's the--
Mr. Morris J. Levy: That's right, but I went to the purpose of the statute, and the purpose of the statute was to prevent the use of inside information which might be obtained by an officer, director, or principal stockholder.
Justice Potter Stewart: As defined?
Mr. Morris J. Levy: Not as defined.
Principal stockholder was later defined.
In other words, they used a rule of thumb.
Originally, they -- as a matter of fact, they wished to make a person liable who owned only 5% of the stock.
As a matter of fact, there were discussions as to whether or not a person, a director, an officer who disclosed confidential information to a third party, whether or not he should be held liable.
And of course, in view of the administrative difficulties in proving that such disclosure was made, Congress dropped that end of it and merely decided to incorporate the words “director, officer, or 10% stockholder.”
Justice John M. Harlan: Does it appear that they dropped it because of administrative difficulties or because they didn't approve it?
Mr. Morris J. Levy: No, of administrative difficulties.
Justice John M. Harlan: Is it?
Mr. Morris J. Levy: Yes, sir.
Justice John M. Harlan: Where does that appear?
Mr. Morris J. Levy: That appears in -- on page 18 of my brief.
In the course of Congressional hearings, one of the draftsmen of the Act testified that Section 16 (b) is designed to reach an insider short-swing profits irrespective of any intention or expectation to sell the security within six months since it is absolutely impossible to prove the existence of such intention or expectation.
And, you have to have this crude rule of thumb because you cannot undertake the burden of having to prove that the director intended, at the time he bought, to get out on a short-swing.
Justice Potter Stewart: Well then, under the statute, a director must disgorge, even though he were completely (Inaudible), is that right?
Mr. Morris J. Levy: That's correct, sir.
Justice Potter Stewart: But, also under the statute, a stockholder who owns only 9% of the stock is not affected by the statute at all.
Mr. Morris J. Levy: That's correct.
Justice Potter Stewart: No matter how much inside knowledge he used?
Mr. Morris J. Levy: That's right, sir.
Now, I refer Your Honors to Section 2 of the Securities Exchange Act of 1934 whereby Congress specifically stated its purpose for enacting the statute in general in these words, and it said, “Transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets are affected with a national public interest which makes it necessary to provide for regulation and control of such transactions and of practices and matters related thereto, including transactions by officers, directors, and principal security holders, to require appropriate reports, and to impose requirements necessary to make such regulation and control reasonably complete and effective, and insure the maintenance of fair and honest markets in such transactions.”
And, of course, they go on for about a page and a half setting forth why -- the reasons why the -- that such transactions are affected with a national public interest.
Now, in construing Section 16 (b) of the Securities Exchange Act of 1934, the Courts have recognized that this type of statute is a remedial statute and that, in order to give it the meaning which Congress intended, there must be a broad application of its terms.
And, the courts have gone out of their way to make certain that there would not be any loophole wherein an insider could transcend the purposes of the statute and realize for himself a short-swing profit denied to other investors.
Under Section 16 (a) of the Securities Exchange Act, provision is made that an insider must file certain reports with respect to his transactions showing the change of ownership.
Section 16 (b), as I've stated before, provides for the recovery of short-swing profits realized by such insider.
Now, it's remarkable to note at this point that there were certain exemptions from the operation of the statute which Congress specifically incorporated in the Act.
For instance, in Section 16 (b), there is exempt from its operation any acquisition of stock received in payment of a debt contracted in good faith.
Otherwise, the person who has contracted a debt, who -- to whom money is owed, obtain stock for the payment of his debt and, if that was done in good faith, the acquisition of the stock is not considered a purchase.
Now, Section 16 (b) further provides that foreign and domestic arbitrage transactions are exempted unless, and the statute specifically says, “Unless it is made contrary to such rules and regulations as the Commission may make for the purpose of carrying out the purposes of this statute.”
Thus, by granting this automatic exemption, under this provision of the Act, and permitting the Commission to make rules avoiding such exemption, it would appear that the Commission has the implied authority to make such rules as it deems proper to carry out the purposes in other cases.
And, this is what the Commission actually did.
Now, about 15 years ago, the Commission decided to promulgate a rule whereby a director who was a partner of a firm who had traded in securities was required to report his proportionate share of the purchases or sales effected by his firm.
Subsequently, this rule was changed, and this rule was changed by the Commission after a case was decided by the Second Circuit, Rattner against Lehman, which is in direct contravention to the purposes for which the statute, Section 16 (b) was enacted.
I think I can get now to the facts of this case and I think you have a history of the statute in general.
I think the facts now will show that in its application, the Court did not apply the proper interpretation.
Justice William O. Douglas: Was the Commission regulation enforced when this transaction took place?
Mr. Morris J. Levy: Yes, sir.
Justice Charles E. Whittaker: That regulation, as I understand it, merely required the partner director to report to the Commission his share in this transaction.
Is that right?
Mr. Morris J. Levy: That's right, sir.
That was -- that was before this case.
When this case was in existence, he was required to report all the transactions of his partnership.
Justice Charles E. Whittaker: The problem -- this is the problem.
That's the prior rule --
Mr. Morris J. Levy: That's right.
Justice Charles E. Whittaker: -- exactly?
Mr. Morris J. Levy: That's right.
Justice William O. Douglas: The one that was enforced when this transaction took place is the one that you printed on page 53 of your brief?
Mr. Morris J. Levy: That's right, sir.
Justice William O. Douglas: Was that one on page 53 later recalled?
Mr. Morris J. Levy: No, it was not.
It still is -- it still is in existence.
Now, the facts of this case are as follows, Lehman Brothers is a New York partnership composed of approximately 17 partners.
Prior to August of 1954, Mr. John Hertz, who was a partner of Lehman Brothers, was a director of Tide Water Associated Oil Company.
His testimony is that he joined Lehman Brothers in 1934 to bring business to Lehman Brothers and that he joined Tide Water as a director to bring business -- its business to Lehman Brothers.
And he further testified that his joint -- his being a director certainly did bring Lehman Brothers business.
He further testified that, during the course of his being a director, he gossiped about the affairs of Tide Water to his partners, discussed the matters with them, and that, of course, in the course of financing which Lehman Brothers did for Tide Water, he, as a director, was the person in charge of that and he discussed the matters with his partners since he had more knowledge of its affairs.
Some time prior to August of 1954, Mr. Hertz decided to resign his directorship from Tide Water and he came over to his partner -- his fellow-partner, Mr. Thomas and said, “Mr. Thomas, how would you like to become a director of Tide Water?”
Mr. Thomas said he would.
So, Mr. Hertz called up the President of Tide Water and said “Mr. Staples, I have a smart young man here who is my partner.
I'd like to have him become a director in my place.”
And, within a short time, of course, Mr. Thomas was appointed a director of Tide Water and his appointment was effective as of the date when Mr. Hertz's resignation took effect.
On the same date, one went in -- went out and the other went in.
Justice Charles E. Whittaker: Did you say appointed?
Is that the way it's done?
Mr. Morris J. Levy: He was the one -- he was appointed at that time because the -- it was an interim term.
Justice Charles E. Whittaker: Oh, I see.
Mr. Morris J. Levy: Now, Mr. Hertz testified that, before his resignation had become effective from the Tide Water Board, there was some discussion amongst the members of the Tide Water Board concerning the issuance by Tide Water of a preferred stock which could be converted -- which could be into which the common could be converted, the common which was outstanding.
There was also some discussion with respect to the refinancing of a new refinery for Tide Water.
And that Mr. Hertz admitted that he discussed these matters with his partners in Lehman Brothers.
Now, after Mr. Hertz have resigned from Lehman -- from Tide Water, Mr. Thomas admitted that, on several occasions, he was asked by his partners at Lehman Brothers what he thought of the business, the prospects of Tide Water, and that he had answered them and told them that the prospects were very good and that it should be a good investment.
And his testimony indicated that he had spoken in this fashion to at least six of his partners at Lehman Brothers, including one, a Mr. Hammerslough who actually gave the orders to Lehman Brothers to purchase -- to commence purchasing Tide Water stock involved in this case.
Now, without a short time after such discussion with Mr. Thomas, Mr. Hammerslough told his office to start purchasing common stock of Tide Water and, when Mr. Thomas saw the common stock being purchased and asked what that was for, he was informed that, “Well, we're purchasing the stock because we expect to convert it into the new preferred which is going to be issued by Tide Water and that we're going to sell it to institutional investors because it's a good investment.
Now, Mr. -- these -- 50,000 shares of this common stock of Tide Water was so-purchased within a period of approximately one month.
Subsequently, the directors and the stockholders of Tide Water did approve a resolution granting the right to issue the preferred stock and permitting the conversion of the common to the preferred stock.
Now, after the resolution was passed, Lehman Brothers converted its preferred -- it's prominence preferred and immediately, within less than six months, a matter of fact, within approximately two months, sold the preferred stock to investor, realizing, as the trial court found a short-swing profit of approximately $98,000.
The Court -- the trial court held that since the statute, Section 16 (b), does not state that a partner must -- or, rather, a partnership must return profit, the trial court decided to go by the literal language of the statute.
The statute said, “A director, an officer, or a 10% stockholder” and the trial court said, “Well, Lehman Brothers is not a director, it is not an officer, and it is not a 10% stockholder, therefore, no liability, as far as they're concerned.
With respect to Thomas, who is a director, well, he has a certain percentage of interest in the partnership.
We'll only award judgment against him for his proportionate share of his partnership interest.
Now, on the course of examination, on the course of the trial, it came out from the mouth of Mr. Thomas that he had waived his right.
After the first purchases of common stock had been made, he had orally told his partners at a luncheon, “I don't want to have any part of this transaction.
I don't want any profit.
I don't want any loss.”
Further, it was shown that -- on other occasions, other partners of Lehman Brothers have similarly waived their rights to transactions or to profits from short-swing transactions in corporations of which they were directors.
And, the testimony showed that during every time which these profits were waived, the other partners of course received more than their proportionate share in order to make up the difference, so that at no time did any of the partners actually suffer any financial loss by reason of their having waived their rights to such profits.
Justice John M. Harlan: I don't understand that.
You say that they got some extra volume from their partnerships as the substitute for what would have been their interest in the short-swing profit?
Mr. Morris J. Levy: No, what I said was, Your Honor, that every time that one partner waived his right to receive his share of the profits, his share of the profits was distributed amongst the other partners.
So, instead of one partner getting, say, 8%, he'd get 8.2%.
And in this way, it was a round-robin where one partner would give up his profits and would not actually be paid that.
He would make it up from another transaction where another partner similarly waived his rights thereto.
Justice Felix Frankfurter: From the point that he made it up, is that your point?
Suppose there hadn't been any made up, just in this Tide Water transaction, and Mr. Thomas forewent his share in the partnership -- in the distributed shares of the partnership.
He said, “In lieu of my relation to Tide Water, I'm not going to take a penny of profit out of that which has come to the firm out of Tide Water's dealing.”
Therefore, there'd be more in the pool left to be distributed among those partners who are in Tide Water oil case.
Is that right?
Mr. Morris J. Levy: That's right.
Justice Felix Frankfurter: Alright.
Mr. Morris J. Levy: But, I say to Your Honor that even if there were no other transactions, assuming that there was no testimony that there had been any other waivers by other partners of profits made by the firm and corporations in which they were directors, that that still would not excuse the return or the recovery from Lehman Brothers in this particular Tide Water transaction because you cannot disassociate a partner from his partnership.
You cannot disassociate what information a partner gives to his partnership.
As a matter of fact, under the partnership law, a partnership must divulge any information concerning the partnership business to his partners.
And, Thomas, naturally, would be under a duty to divulge such information to his other partners.
Justice Felix Frankfurter: I don't follow that.
I had in my mind the recent experience of one of the most pristine investment office in England, one of the partners of which was a member of the governors of the Bank of England.
He was under obligations to make no revelation to -- to his other partners.
In this country, was that against the law?
Mr. Morris J. Levy: Well, under the--
Justice Felix Frankfurter: I don't know.
I'm asking you.
Mr. Morris J. Levy: Under the New York Partnership Act, Your Honor, each partner must divulge information involving the partnership business.
It cannot withhold such information with the other partners.
Justice Felix Frankfurter: In the situation I put to you, in that troublesome case in England, it couldn't happen here.
Mr. Morris J. Levy: Apparently, it couldn't happen in New York or it shouldn't happen in New York.
Justice Felix Frankfurter: Is that a specific provision in the New York Partnership Law?
Mr. Morris J. Levy: Yes, sir.
Justice Felix Frankfurter: Do you mind reading it?
Mr. Morris J. Levy: Well, apparently, Your Honor, at this moment, all I can find is Section 23 of the Partnership Act which provides partnership charged with knowledge or notice to partner and it can be imputed and implied that if a partner knows something, then the other partners must know that, too.
Justice Felix Frankfurter: That means the director of a company who is a partner in a firm must tell all his fellow directors, his fellow partners, business of the firm of which he is a director.
Is that what you --
Mr. Morris J. Levy: As long as you--
Justice Felix Frankfurter: -- saying?
Mr. Morris J. Levy: No, I don't say that.
I say if it reflects upon the business of the partnership, if it involves the business of the partnership.
Justice Felix Frankfurter: Although he's under -- the statutory duty is not to make that disclosure, not to give off confidential information in his director's role, is that it?
Mr. Morris J. Levy: Well, the question is, how can -- it's actually between two firms.
Whether he has to disclose information to his partnership of anything that involves partnership business and, if he's under a duty not to disclose, because he's a director, confidential information, then the question is what should he do?
But I don't think we're confronted with this problem at the present time.
Justice Felix Frankfurter: Well, I think that makes some differences.
There's a statutory duty of one partner to tell all the inside information--
Mr. Morris J. Levy: Well, here's--
Justice Felix Frankfurter: -- of the corporation of which he's a director.
That may have a bearing on this case.
Mr. Morris J. Levy: Well, Section 42 of the Partnership Act provides duty of partners to render information.
Partners shall render on demand true and full information of all things --
Justice Felix Frankfurter: Well, that's already on demand.
That's already a qualification.
Mr. Morris J. Levy: On all -- of all things affecting the partnership to any partner or the legal representative of any deceased partner or partner under legal disability.
Justice Felix Frankfurter: You don't have to interpret that New York statute in this case in its fullness.
Mr. Morris J. Levy: Now, getting back to the case of -- at hand, Your Honors, Judge Medina, who wrote the majority opinion for the court below, recognized that the purpose of the statute would provide -- would desire that the partnership be held responsible for all the short-swing profits realized by it because the director is -- the director of the corporation is also a member of the partnership and he stated there is only one way to prevent stock manipulations by insiders to whom confidential information is available and that is to squeeze every possible penny of profit out of such transactions.
This has been held to be the clear purpose of Section 16 (b), a broadly remedial statute.
One way to do this was to construe Section 16 (b) to include the partnership because of the unity of the partnership relationship and the fact that one of the partners is a director.
He decided not to follow this because of a case previously decided by the same court in Rattner against Lehman.
Now in that case, the plaintiff came to court, asked for judgment against the partnership upon the bare legal assertion.
Here, you have a partnership that realized profits from its short-swing transactions.
The director -- a partner is a director of the firm.
Therefore, the partnership is responsible.
There was no proof of any information being given to any of the partners concerning the prospects that -- the business affairs of the corporation.
Now, in this particular case, there's an -- the undisputable proof that Mr. Thomas and Mr. Hertz discussed the matters of Tide Water with their partners, that the Lehman Brothers advised Tide Water with respect to its financial operations, and of necessity, had to have knowledge of its business affairs was in it of itself in a fiduciary relationship to Tide Water because of that.
Similarly, as if an attorney who represented a corporation had to be informed about serving information would be a fiduciary.
From an addition to being such fiduciary, there was -- the partner who was the director on the Board and the statute says that any short-swing profits realized by such person must be recoverable or may be recoverable from him.
Justice Felix Frankfurter: Mr. Levy, can you tell without arguing it, just unequivocally, can you tell whether New York has the entity theory of a partnership?
Mr. Morris J. Levy: Had the entity theory?
Justice Felix Frankfurter: Yes.
Is the New York law based on an entity conception of a partnership?
Mr. Morris J. Levy: Offhand, Your Honor--
Justice Felix Frankfurter: I just want to know, is it capable of being to say yer or no?
Mr. Morris J. Levy: Offhand, Your Honor, I wouldn't know.
I couldn't give you an answer.
I wonder, Your Honor, if I may reserve the rest of my time for rebuttal on this.
I think you have enough of my argument.
I'd like some -- the additional time for my rebuttal.
Chief Justice Earl Warren: You may do that.
Mr. Morris J. Levy: Thank you, sir.
Chief Justice Earl Warren: Mr. Seymour.
Argument of Whitney North Seymour
Mr. Whitney North Seymour: Do I precede the Government on this, Your Honor?
The Government is here as amicus curiae.
Chief Justice Earl Warren: Oh, whichever order -- whichever order you have --
Mr. Whitney North Seymour: I rather assume the --
Chief Justice Earl Warren: -- agreed before.
Mr. Whitney North Seymour: -- Government would go next.
Chief Justice Earl Warren: Very well.
Mr. Conwill, will you proceed first, yes?
Argument of Allan F. Conwill
Mr. Allan F. Conwill: Thank you.
Mr. Chief Justice and may it please the Court.
I would, first of all, like to clarify a view of the Securities and Exchange Commission concerning Mr. Justice Frankfurter's question to counsel for the petitioner on the duty of a partner to disclose information concerning the corporation of which he is a director to his partnership.
I think Section 42 of the New York Partnership Law may very well be read to indicate a duty on the part of a partner to disclose his partnership or disclose to his partnership confidential information.
But we, at the Commission, very strongly feel that Section 16 (b) of the Exchange Act provides a paramount duty and that paramount duty in the Federal Act overrides any duty that he might have to disclose under Section 42 of the New York State Partnership Act.
Justice Potter Stewart: What 16 (b) have -- or the Exchange Act have to say about disclosure or nondisclosure, nothing, does it?
Mr. Allan F. Conwill: It has nothing to say and disclosure or nondisclosure is irrelevant, sir.
Now to us, at the Securities and Exchange Commission, there are only four basic facts with which this Court need to concern itself in order to render a decision in favor of the position we urge.
In this connection, perhaps we take a slightly different view than counsel for the petitioner but to us, the only four vital facts are, first of all, that Joseph Thomas was a partner in Lehman Brothers.
Second, that he was a director of Tide Water.
Third, that Lehman Brothers bought and sold Tide Water equity securities within a period of six months.
And fourth, that Lehman Brothers realized a profit.
All of these facts are admitted and it is our contention that these four basic facts must establish liability under Section 16 (b).
Justice Potter Stewart: Liability on whose part?
Mr. Allan F. Conwill: Liability, we contend, on the part of Lehman Brothers, the partnership for the full amount of profits which were realized.
Liability also on the part of Joseph Thomas for the full amount of profits realized.
Justice Potter Stewart: What if, instead of telling Lehman Brothers -- what if instead of Lehman Brothers, his partners purchased and sold these securities, what if his brother had, who was not his partner?
And let's assume, if you think it's relevant at all, that he had given his brother a lot of inside information.
Mr. Allan F. Conwill: I don't think it's relevant at all that he gave his brother inside information.
Justice Potter Stewart: The statute makes that entirely irrelevant, doesn't it?
Mr. Allan F. Conwill: It does.
That would pose a difficult question for us at the Commission because we feel that Section 16 (b) should be interpreted in light of whether or not the relationship or the transaction gives rise to the danger or the potentiality of the use --
Justice Potter Stewart: Well, I suppose more people have brothers --
Mr. Allan F. Conwill: -- of inside information.
Justice Potter Stewart: -- than have partners, don't they?
Mr. Allan F. Conwill: I beg your pardon, sir?
Justice Potter Stewart: I suppose there are more people with brothers than there are people with partners, aren't there?
Mr. Allan F. Conwill: I'm sure that's correct.
Justice Potter Stewart: So, probably, the danger is greater telling your brother than it is of telling your partner.
It would happen more often.
Mr. Allan F. Conwill: Possibly, sir, although I would say that the relationship of partners is of a type of intimacy that sometimes you do not always find in brothers.
Justice Potter Stewart: Well, instead of a brother, let's take a wife.
What if he told his wife?
Mr. Allan F. Conwill: Again--
Justice Potter Stewart: And his wife had made -- had bought -- had been in a position to buy $50 million-worth of securities and turn a short-swing profit of $100,000.
Mr. Allan F. Conwill: In the situation of the wife, the partner certainly has, I would say, in the normal case of beneficial interest, and what the wife does, any profit she realizes in the ordinary marriage, I would say, would go down to his benefit.
And, again, the danger of the transmission and the use of inside information is there.
Justice Potter Stewart: What I was really getting at, Mr. Conwill, was only this.
You stated these four conceded uncontested facts and acted as though that was kind of a QED under this statute and I just was wondering if it was a QED.
Mr. Allan F. Conwill: It is in this case because, here, of course we are considering the partnership.
I might say that we can do apply a test in 16 (b) cases similar to a test applied by a distinguished jury as happened in the Sixth Circuit in Fredo against Newman, that is, you look at the transaction and the relationship and determine from that whether or not there is a danger of the use of inside information.
Justice Potter Stewart: Now, is that particular case has got quite a different issue.
Mr. Allan F. Conwill: It's quite a different issue, I agree, but the basic reasoning to us is relevant.
Justice Felix Frankfurter: Well, it can't -- they can't be quite as loose that you've just put it because the danger in the hypothesis given by Justice Stewart, if it's merely a question of danger, then you could be with the brother and the wife situation.
Mr. Allan F. Conwill: I agree--
Justice Felix Frankfurter: If you look at the specific -- if that's the test.
Mr. Allan F. Conwill: I agree that, to use that test and that test alone --
Justice Felix Frankfurter: And what do you --
Mr. Allan F. Conwill: -- would not be sufficient.
We need something more.
Justice Felix Frankfurter: What did you have before?
Mr. Allan F. Conwill: In this case, Mr. Justice Frankfurter, we do have something more.
We have the relationship of the director and the partner.
The partner was a director.
The Partnership Act was his Act under conventional and under New York Partnership Law.
So, we tie it in --
Justice Felix Frankfurter: Well, we do have to go back and consider -- if I refer -- if I'm tied with the implication of the remark you just made -- do we have to go back to conceptions of the partnership's relation and to see the general condition of a partnership?
Mr. Allan F. Conwill: Yes, sir.
What I was --
Justice William O. Douglas: Partnership under the Act is a -- is it a person?
I forget the definition.
Mr. Allan F. Conwill: Yes, sir.
Under Section 3 (a) (9) of the Exchange Act, “person” includes “a partnership.”
Therefore, we would say that when Section 16 (a) starts off, “Every person who is a beneficial owner, director, or officer, that the person --”
Justice John M. Harlan: 10% beneficial owner?
Mr. Allan F. Conwill: Yes, sir.
That “person” since it includes partnership, can properly include the partnership as a director in this situation and, indeed, where the danger is so clearly present or the potential use -- the potential unfair advantage to be gained by unfair use of information is there, we believe that Section 16 (b) must be so construed.
Justice Felix Frankfurter: Where is the word “person” in 16 (b)?
Mr. Allan F. Conwill: It is not in Section 16 (b).
Justice Felix Frankfurter: But, how does that definition help you?
Mr. Allan F. Conwill: The definition helps us in this way, Mr. Justice Frankfurter.
Section 16 (b), in referring to beneficial owner, director, and officer, refers back to the reporting requirements of these categories in Section 16 (a).
Section 16 (a) leads up, “Every person who is a director.”
Justice Felix Frankfurter: Well, then is the partnership a director?
Mr. Allan F. Conwill: We take that position that for purposes of --
Justice Felix Frankfurter: You mean that Lehman Brothers was a partnership of this concern, of this corporation?
Mr. Allan F. Conwill: We take that position, sir, in this case.
We feel that--
Justice Felix Frankfurter: Is that vital to your case?
Mr. Allan F. Conwill: Yes, sir.
It is vital to the case.
We feel that, in order to effectuate the statutory purpose of Section 16 (b), that it is necessary to consider Lehman Brothers as equivalent to a partner of Tide Water Associated Oil Company.
Justice Felix Frankfurter: Well, I don't want to make a fine point of it, but you have to say it is a part -- that it is a director, not equal to, but a director.
Mr. Allan F. Conwill: That is correct.
We're not saying really “equal to,” we're saying that, for purposes of Section 16 (b), we're urging the Court to consider Lehman Brothers as a director.
Justice Charles E. Whittaker: May I ask you please, did I correctly understand you to say, in answer to Mr. Justice Frankfurter, that you consider it vital to your case that we consider director to include partnership as the form of word is used in 16 (b)?
Mr. Allan F. Conwill: Well, that is the legal rationale by which we arrive at the result which we urge, Mr. Justice Whittaker.
Justice Charles E. Whittaker: Well, suppose that a partner actually, beneficially interested, had such equity securities taking the names of other people.
It'd still be his transaction (Inaudible)?
Mr. Allan F. Conwill: Are you referring now to the partner who is a director?
Justice Charles E. Whittaker: Yes.
Mr. Allan F. Conwill: Yes, it would be the partner's transaction.
Justice Charles E. Whittaker: Alright.
Now, suppose he had a piece of it and somebody else had a balance, would it be different?
Mr. Allan F. Conwill: No, sir.
It seems to me that --
Justice Charles E. Whittaker: And that would all be directors?
Mr. Allan F. Conwill: I believe, in that situation, that they would all be directors because they form what is, in effect, a pool or perhaps a joint venture for this particular purpose.
It's something like a partnership in this situation and I believe that if a director engages in that form of endeavor, then the people who join with him in it, because of the danger of the use of inside information, should likewise be held liable under Section 16 (b).
This danger, I cannot overemphasize --
Justice William J. Brennan: May I just ask one other question?
Mr. Allan F. Conwill: Yes, sir.
Justice William J. Brennan: Does that lead us thus far?
Suppose Mr. Thomas had been killed over a period -- over the period when all these transactions occurred.
In consequence, he was not able to give any attention either to his duties as director or as partner, yet resigned from neither position, would you be taking any different position for that?
Mr. Allan F. Conwill: No, we would not, because under the admittedly arbitrary test, the arbitrary rule of thumb is 16 (b), that would be irrelevant.
I wonder if I may dwell, for a few moments, upon the reality of this danger because, to us, he reality of the danger is brought into very sharp focus by the very facts of this case and its predecessor, Rattner against Lehman.
And I believe counsel for petitioner told you that, in Rattner against Lehman, a partner of Lehman Brothers was held liable only for his pro rata share of the profits of a short-swing transaction and securities of the corporation at which he was a director.
Justice Potter Stewart: That case was decided about 10 years ago.
Mr. Allan F. Conwill: 1952 at January, I believe.
Now, the testimony in this case shows that when Joseph Thomas, the Director of Tide Water, learned of the Lehman Brothers' purchase of Tide Water equity securities, he went to his partner, Robert Lehman, and asked him the purpose of the transaction.
And upon being told the purpose, Thomas apparently stated that it might prove embarrassing for him because of his Tide Water directorate.
The response of Robert Lehman is very interesting and quite significant.
He said, “Well, you,” meaning Thomas, “had better do something about it.”
Robert Lehman didn't suggest that Lehman Brothers should do anything about it and indeed, why should he, because he had Rattner against Lehman as a precedent before him only approximately three years before.
And, under Rattner against Lehman, while John Hertz, his partner, was forced to give up a small amount, his pro rata share of the profits in the consolidated Vultee Aircraft transaction which was the subject of that decision, Robert Lehman made money and as did every other partner of Lehman Brothers, including Joseph Thomas.
Now, he has the Tide Water transaction before him and, this time, it's Joseph Thomas' turn to lose a little money.
But, Robert Lehman makes money, as do all of the other partners of Lehman Brothers, including John Hertz, who more than recoup what he made out of his losses in the consolidated Vultee transaction which gave rise to Rattner against Lehman.
Now, when does this cycle end?
Who is to say it will ever end?
If this Court --
Justice Potter Stewart: Don't you think -- to answer your question, don't you think it's for Congress to say?
Rattner has been on the books for 10 years.
The SEC makes periodic reports to Congress, tells them all about the Rattner case.
Don't you think it's for Congress to say when this is -- when the law is going to be changed?
Mr. Allan F. Conwill: In the first place, sir, Rattner against Lehman was a decision of the Second Circuit.
Justice Potter Stewart: That's correct.
Mr. Allan F. Conwill: We, at the SEC, do not feel compelled to run to Congress every time we get an adverse result in the Circuit Court.
Justice Potter Stewart: Well, hasn't -- haven't -- hasn't about 90% or more of this litigation under this statute in the Second Circuit?
Mr. Allan F. Conwill: A large amount of it has (Voice Overlap) --
Justice Potter Stewart: All the precedence I could find were Second Circuit precedence.
Mr. Allan F. Conwill: Certainly, a large amount of it has, but we felt it was proper --
Justice Potter Stewart: This--
Mr. Allan F. Conwill: Since this was only one circuit, to wait and see when it would happen again.
Now, as to our reporting to Congress, we did report the results of Rattner against Lehman in our annual report in 1952, at which time it was still on appeal and we simply reported it -- or, rather, 1951.
In our annual report for 1952, which run some-253 pages, we devoted 8 lines to explaining simply the result of Rattner against Lehman, which is what we normally do.
All the divisions in the Commission make a report to Congress which is included here.
In the case of the General Counsel's Office, which is responsible for litigation, they simply result -- report the results of that litigation.
They do not go ahead and make recommendations and indeed, on the basis of a single Circuit Court opinion here, it would have been highly unusual if we had.
Justice Felix Frankfurter: Not if the evil is of greater (Inaudible) and here it is.
That's the whole point of having an adverse decision by a court in which this kind of litigation dissented, reaching such a disastrous result and not asking for remedies, and I think it foregoes this case.
All I'm saying is you -- your suggestion that you don't run to Congress every time you have an adverse decision, I commend you for doing that, but not if the evil is as portentous as you tell us.
Mr. Allan F. Conwill: We believe the evil is every bit as portentous as I have told you, Mr. Justice Frankfurter.
I will say this.
In Rattner against Lehman, our hands were tied.
We were appearing amicus in that case and we could not bring it up to the Supreme Court.
We could not petition that for cert as an amicus.
Now, it only took three years for this situation to develop again with the very same defendant.
Justice Felix Frankfurter: But it developed at the time--
Mr. Allan F. Conwill: And we have --
Justice Felix Frankfurter: The point is it developed at the time, and presumably it's a safe rule of life that people would go on doing the same thing.
That's the general principle which I have been curious to verify.
Mr. Allan F. Conwill: I believe sir that it is not safe to assume that the danger is minimal if this Court upholds Blau against Lehman because if this Court upholds Blau against Lehman, you are going to, in effect, give license to the investment bankers and any other kind of a partnership to engage in this type of transaction.
Justice Felix Frankfurter: And you, again, are going to rest that it's not your business to run to Congress every time you get an adversed opinion.
Mr. Allan F. Conwill: I believe we might well regard the decision of this Court as something more significant than an opinion of a single Circuit, sir.
Justice Felix Frankfurter: Merely, the Second Circuit by the judge's dissent in that case.
Mr. Allan F. Conwill: I repeat, I believe, we may well take a different attitude.
But, back to the danger again because that is important, it is there, we got Robert Lehman making money in two transactions and there's no indication of where this might stop.
He can have successive transactions or his partnership can.
Now, it may well be, speaking hypothetically, that they will continue and we say that it may well be something more than hypothetical if this Court upholds the Second Circuit in this case.
But, if they do, there can be a succession of transactions.
Maybe in one of them, in some future date, Robert Lehman will lose money if Lehman Brothers trades in an equity security of a corporation of which he is a director.
But, that won't matter to him because it will be insignificant in comparison with the bundle of money that he has made in prior transaction and insignificant in comparison with the bundle which he can make in future transactions.
We say that the type of result which the Second Circuit decision will encourage is very little different than the pooling arrangements which were so roundly condemned by the Senate report which preceded the Securities Exchange Act.
In these pooling arrangements, investment bankers and insiders were often involved and we believe that the Senate report accurately characterized these pooling arrangements as vicious, as predatory, and as flagrant violations of fiduciary duties.
It is true, as respondent's brief asserts, that the when Section 16 (b), or what ultimately became Section 16 (b), was first introduced into Congress, it contained a provision, first, which barred any insider from disclosing confidential information and, second, impose short-swing liability on any person -- any person to whom that disclosure was made.
Now, this provision was sweeping in character, and plainly, it could have embraced partners or directors.
But, it was so sweeping that it could have embraced friends, relatives, barbers, bartenders, bootblacks, or anyone else that you would care to name.
And, the reason it was deleted is because it would have required proof of disclosure and that proof of disclosure made it, as the respondent's brief concedes, a dubious administrative practicality.
Now, the respondent argues from that that its elimination means that, obviously, Congress intended to exclude from the operation of Section 16 (b) partners of directors, but I would suggest to this Court that the elimination of a broad provision because of administrative difficulties of enforcement actually reflects a Congressional intent to construe what remains in Section 16 (b) broadly.
And, I suggest to the Court that this conclusion finds ample support in the history of judicial interpretation of Section 16 (b).
In fact, you have filed with you in this case a brief amicus from the American Society of Corporate Secretaries and I believe a reading of that brief and the cases they cite will clearly indicate that the cases which give them so much pain prove our point, namely, that never -- nearly every court which has had an opportunity to consider Section 16 (b) as recognized that it is necessary to construe it broadly in order not to frustrate its plain statutory purpose.
I might add that, while we are obviously urging a broad construction on you today suggesting that you find that Lehman Brothers is a partner within the meaning of Section 16 (b), that we don't regard this as an extraordinarily novel or startling interpretation.
Justice William J. Brennan: You said is a “partner,” is a “director.”
Justice William O. Douglas: Meaning “director”?
Mr. Allan F. Conwill: Is a director, I beg your pardon.
We think this type of reasoning find support in other cases, notably, those consistently rendered under Section 249 of the Bankruptcy Act.
I'm sure the Court recalls that under Section 249, no compensation shall be allowed to any committee or attorney or their person acting at a bankruptcy or reorganization proceedings in a fiduciary capacity who buys or sells stock of or claims against the debtor.
Now, the statutory purpose behind Section 249 is comparable to that of Section 16 (b).
The Congress recognized that active participants, in say, a Chapter 10 reorganization proceeding were in a position to have access to information not generally available to the public.
And in order to bar the use of that inside information, they enacted a arbitrary standard, a rule of thumb, if you will, similar to that in Section 16 (b) saying, “If you buy or sell, you can receive no allowance.”
Again, under 249, as in Section 16 (b), good faith is irrelevant.
Lack of use of inside information is no defense and the cases have interpreted this, at least as broadly as we are asking you to interpret Section 16 (b).
Justice Felix Frankfurter: But you had a generalized catch-all phrase or other fiduciary relationship.
Mr. Allan F. Conwill: Or other fiduciary capacity --
Justice Felix Frankfurter: That --
Mr. Allan F. Conwill: -- which means anyone who has entered an appearance --
Justice Felix Frankfurter: Have you got any --
Mr. Allan F. Conwill: -- in the proceeding.
Justice Felix Frankfurter: -- any such catch-all phrase in 16 (b)?
Mr. Allan F. Conwill: No, sir, although I don't regard that as exactly a catch-all capacity.
Justice Felix Frankfurter: Well, on any other --
Mr. Allan F. Conwill: It refers to --
Justice Felix Frankfurter: -- fiduciary capacity meaning we have to construe what a fiduciary capacity is and that isn't easily fit into (Inaudible), is it?
Mr. Allan F. Conwill: Other fiduciary -- well, fiduciary capacity means, we believe, a participant in the proceeding who is neither an attorney nor a member of the committee.
Justice Felix Frankfurter: Now, what comparable phrase is there in 16 (b)?
Mr. Allan F. Conwill: We don't have one precisely comparable, sir.
Justice William O. Douglas: Except the word “such” that carries you back to 16 (a)?
Mr. Allan F. Conwill: That's right.
Chief Justice Earl Warren: We'll recess now, Mr. Conwill.
Mr. Allan F. Conwill: Thank you.
Argument of Allan F. Conwill
Mr. Allan F. Conwill: At the close yesterday, I was discussing Section 249 of the Bankruptcy Act which has an underlying statutory purpose comparable to that of Section 16 (b) of the Securities Exchange Act.
In that connection, I would like to mention briefly two cases which are cited at page 23 of our brief.
Neither of these cases involves the phrase “other person acting in the proceedings in a representative or fiduciary capacity,” which Mr. Justice Frankfurter regards as a catch-all and I do not.
In the first of these cases, the Midland United case, Chief Judge Biggs in the Third Circuit, although he was there sitting on the District Court for the State of Delaware, held that a protective committee member could not receive an allowance because a corporation which he was president bought and sold the debtor's securities.
And, the court made this holding notwithstanding the fact that the committee member, as president of the corporation, had no interest therein which would entitle him to share the profits.
And in the Los Angeles Lumber Products Company case, the court there held that a partnership was not entitled to an allowance for its services to the estate because a partner unconnected with the Chapter 10 reorganization proceedings there concerned had traded in the debtor's securities.
And, it is interesting to note that the court in that case observed that its application of Section 249 may seem harsh and may work a hardship on innocent persons, but the court held that the rule must be severe in order to be effective and we urge upon this Court that the application of Section 16 (b) must be severe in order to be effective.
Justice Potter Stewart: Mr. Conwill, what if Lehman Brothers, instead of being a partnership, were a corporation and an officer of the corporation were in the position of Mr. Thomas, the director here, would all the stockholders of Lehman Brothers be directors of the Tide Water Associated Oil Company under 16 (b)?
Mr. Allan F. Conwill: I would answer that this way, Mr. Justice Stewart.
If Lehman Brothers Incorporated, as you know some investment banking firms have --
Justice Potter Stewart: Yes.
Mr. Allan F. Conwill: And operated in the same way that it now operates as a partnership, the Commission would urge upon this Court that the stockholders of that corporation who would hold interest comparable to the partnership interest should be held liable.
Justice John M. Harlan: All in the -- what?
Mr. Allan F. Conwill: The corporation would be a director, as would they.
Justice John M. Harlan: Directors without portfolio, so to speak.
Mr. Allan F. Conwill: I think that's a good way of putting it, Mr. Justice Harlan.
I want to observe -- excuse me, Mr. --
Justice Felix Frankfurter: Mr. Conwill, the claim procedure that's not -- have talked about whether the thing is a catch-all or not, but under your Bankruptcy Act, there was a phrase less restrictive -- there was a phrase that isn't as restrictive as direct inference.
Is that true?
Mr. Allan F. Conwill: Well, the phrases are, sir --
Justice Felix Frankfurter: What is the phrase in the statute?
Mr. Allan F. Conwill: “Committee or attorney or other person acting in the proceedings in a representative or a fiduciary capacity.”
Now, that --
Justice Felix Frankfurter: You know very well that -- who is and who isn't a fiduciary in the subject matter that your Commission has had to deal with and this Court has had to deal with.
In the (Inaudible) case we indicated, if the Commission at least, were clear to me, if the Commission as a matter of its own cumulative experience could say that a protective committee is in a fiduciary relation, that gave it scope -- that should gave it scope so to hold.
What I want to know is what -- it was a very different thing.
In the first (Inaudible) case, they say that it's established by a credible principle.
What I want to know is what there is in this statute that gives that leeway of construction that you have in phrase like “in a fiduciary relation” or “a fiduciary transaction.”
Now, when Congress uses words like “director,” it doesn't mean “or anybody else having a fiduciary relation,” does it?
Mr. Allan F. Conwill: No, sir.
Justice Felix Frankfurter: I don't suppose you're contending that.
You contended that Lehman Brothers, on partnership, what shall I say, speculation -- partnership notions or the -- is that the partnership was a director.
But, you're not contending that there's anything comparable, in turn, a category in 16 (b) comparable to the concept of a fiduciary relation.
There are instances of fiduciary, but is there a category of fiduciary?
Mr. Allan F. Conwill: I believe that the absolute liability imposed by Section 16 (b), in effect, makes a director a fiduciary.
Justice Felix Frankfurter: A director, of course, is a fiduciary, but is every fiduciary a director?
Mr. Allan F. Conwill: Not the reverse but, in this case, I believe that Joseph Thomas, being a partner of Lehman Brothers, has the effect of making the partners of Lehman Brothers and Lehman Brothers, the partnership.
We'll say, fiduciaries without portfolio, perhaps.
Justice William O. Douglas: This is the same position I gather with Learned Hand took in his concurring opinion in the Rattner case.
Mr. Allan F. Conwill: Not precisely.
Learned Hand, in the Rattner case, had reservations because he felt that if it were shown that Lehman Brothers deputized John Hertz, deputized him to go on the Board of Directors, he might reach a different result.
Our position here today is that deputisi -- deputization makes no difference.
We say the mere fact that he is a director and is a partner brings the partnership within the scope of liability.
Justice Felix Frankfurter: Do you say that that is the consequence to the legal relation of partners intercede?
Is that what you're saying?
Mr. Allan F. Conwill: I'm saying that and I'm also referring to the fact that 16 (a) of the Exchange Act refers to any person who is a director and Section 3 (a) (9) defines “person” to embrace partnership.
Justice Felix Frankfurter: But there is the word “person.”
It doesn't exist in 16 (b).
How do you bring six -- how do you bring the definition of “person” into 16 (b) unless they're in corporation by reference?
Mr. Allan F. Conwill: Because Section 16 (b) refers to such beneficial owner, director, or officer and the “such” relates back to every person who is a director in Section 16 (a).
Justice Felix Frankfurter: And there is no particularization required in 16 (b).
If “person,” as defined above, include almost everybody --
Justice William O. Douglas: 16 (b) wouldn't be broader than 16 (a)?
Mr. Allan F. Conwill: No, sir, it would not be broader.
It's coextensive with 16 (a), but “person” obviously has to mean something more than an individual because, for example, in Magida against Continental Can, Continental Can, a corporation, was a beneficial owner of more than 10% of the capital stock of Vulcan Detinning Company.
And the Second Circuit there had no difficulty holding Continental Can a person for purposes of Section 16 (b).
Justice Felix Frankfurter: I gather, you do not contend that on this record, there was a deputizing effect.
Mr. Allan F. Conwill: To --
Justice Felix Frankfurter: The deputizing has any meaning other than people of partners, and then you don't have to talk about deputizing.
There wasn't that something difference, was there, here?
Mr. Allan F. Conwill: Two courts below have concluded that there was no deputizing and, while I think that conclusion is somewhat unrealistic, we are willing to accept it because we don't think it's necessary.
May I say this, that we're not here concerned with the concepts of who is or is not a director within the meaning of traditional state corporation law.
What we're here concerned with is who can properly be included within the term “director” for the purpose of carrying out the statutory purpose of a provision of what might be regarded as federal incorporation law because I believe the Court --
Justice Felix Frankfurter: I don't know what that means --
Mr. Allan F. Conwill: -- is aware --
Justice Felix Frankfurter: I don't know what that means, federal incorporation law.
Mr. Allan F. Conwill: Well, I believe the Court is aware that it has been judicially observed that the several Securities laws have, in effect, created a sweeping body of federal statutory corporation law which brings into being managerial duties and liabilities wholly unknown to the common law.
And we say, in order to interpret this statute properly, in order to carry out its obvious purpose, that it is proper to consider Lehman Brothers the partnership as a director.
It does seem to us also that basic principles of fairness would demand that, in this type of situation, a partner who is a director and his partnership should abstain from trading when he is in this position.
And, we believe the essence of this basic principle of fairness has been codified in Section 16 (b).
Chief Justice Earl Warren: Now, Mr. Seymour, I think we are ready for your argument.
Argument of Whitney North Seymour
Mr. Whitney North Seymour: Mr. Chief Justice and may it please the Court.
I think the problem presented by this case is a simple one and I shall not take much of the Court's time.
The question posed is whether the Court should extend the language of Section 16 (b) of the 1934 Act so as to embrace the partners of a director and make them directors so that the profits on a short-swing transaction are recoverable in this kind of an action.
Now, the decision below was, I think, in accord with the -- both the judicial and administrative construction of the Act prior to that time.
The position taken by my friend from the Securities and Exchange Commission today is very much more extreme than any position taken before and I think inconsistent with the administrative construction which the Commission has followed before.
Indeed, I think it's inconsistent with the position that was taken by the Commission in its brief amicus in support of the petition here because, there, they said it is not necessary to urge that the partners become a director and, yet, that is the key of their position today.
Now, the court below followed a decision in the Second Circuit rendered in 1952 in Rattner against Lehman, a decision by a strong court composed of Hand and Judge Swan.
Prior to that decision, the regulation of the Commission under this statute provided that partnerships owning securities might file either, in effect, a --
Justice Felix Frankfurter: Mr. Seymour
Mr. Whitney North Seymour: They might file either the --
Justice Felix Frankfurter: Well, I --
Mr. Whitney North Seymour: The director might file either on the basis of the partnership interest or his interest in the partnership, and the Rattner case was, in part, predicated upon that regulation.
After the Rattner case, the regulation was modified to the extent that the partner was required to show the partnership interest.
He might, if he liked to, show his own interest in the partnership but in a release issued contemporaneously with the regulation.
The Commission indicated that it was not departing from the principles in Rattner against Lehman and, therefore, until the Commission participated below or sought to participate below, the Commission then adhered to an acceptance of the principle of Rattner against Lehman, or at least I think that's a fair construction of their administrative procedure.
Now, below, Judge Clark in his dissent strongly invited the Commission to participate, although they hadn't participated before, and they sought to participate on rehearing and were denied that opportunity, and then joined in the application for certiorari here.
Justice Felix Frankfurter: Can I ask you this question, which you can deal with whenever it fits into your -- the architecture of your argument.
Could the Commission explicitly formulate into a regulation, under implementing powers of issuing regulations, a prohibition that would explicitly take care of this situation -- this kind of a situation?
Mr. Whitney North Seymour: I should now --
Justice Felix Frankfurter: And, by “kind,” I mean a class of precisely this type of situation.
Mr. Whitney North Seymour: I should very much doubt if the Commission, by regulation, could extend the terms of the statute.
Justice Felix Frankfurter: Well, I know it can't do that, but would it be -- in other words, would that be extending the term?
Mr. Whitney North Seymour: I would think so.
But the Congress, in a penal statute which was a web of presumptions, laid it down that certain people should be absolutely liable for short-swing profits, directors, officers, and stockholders of 10%.
Justice William O. Douglas: Because I understand it, Mr. Seymour, the Commission has nothing -- no function to perform here, has it, except the filing --
Mr. Whitney North Seymour: Sir, to lay down the regulations about filing and public --
Justice William O. Douglas: Filing --
Mr. Whitney North Seymour: -- disclosure.
Justice William O. Douglas: -- and public disclosure.
Mr. Whitney North Seymour: But, it was in that connection that the Commission, in my view, accepted the decision in Rattner against Lehman.
Justice William O. Douglas: But the -- the sanction of 16 (a) and 16 (b) were -- lies in suits by it.
Mr. Whitney North Seymour: That's quite correct.
Justice William O. Douglas: But they did, however -- the Commission couldn't start the suit.
Mr. Whitney North Seymour: That's right, but the Commission did have a function about the -- those who must disclose, in the manner of disclosure, and was in that connection that they adopted Rattner against Lehman, I submit.
Justice Felix Frankfurter: But, the Commission had general powers of regu -- of issuing regulations consistent with the scope of the statute.
Mr. Whitney North Seymour: Yes, sir.
Justice Felix Frankfurter: And, therefore, I should think, within limits, I'm speaking quite irresponsible in sense, but I don't know.
Within limits, I should think they could define -- they couldn't say that the counsel for the -- for a firm is a director of the firm and he isn't a director, but I should think they'd have a little leeway of who is a director if within certain corporate relationships, some directors can't vote, for instance, nonvoting directors.
I should think they could define who are directors without offending the general concept of what a director is, wouldn't you think so?
Mr. Whitney North Seymour: Well, perhaps so, but the statute defines who is a director.
Justice Felix Frankfurter: Are you --
Mr. Whitney North Seymour: I'll come to that in a moment.
Justice Felix Frankfurter: Alright.
Mr. Whitney North Seymour: Now, let me --
Chief Justice Earl Warren: Mr. Seymour, is that statement that was contemporaneous with the regulation in the record?
Mr. Whitney North Seymour: It's in our brief, if Your Honor pleases, and --
Chief Justice Earl Warren: Well, don't bother to find it.
Mr. Whitney North Seymour: I have it -- I have it here.
Chief Justice Earl Warren: I'll find it.
Mr. Whitney North Seymour: I'll give you the page in just a second.
Page -- the statement appears at page 23 of our brief.
Yesterday, Mr. Levy, I thought, was a little over exuberant in his statement of the facts here and he made no reference to the fact that there were findings by the two courts below, and I'm not going to take up what I think are some errors in the facts that he made because I think the findings were -- the things the Court will be concerned with here and my friend from the Commission has correctly said that among those findings was a finding that there was no deputization to Mr. Thomas.
The other findings -- the other main findings are that Thomas became a director at the instance of Tide Water.
While his name had been originally suggested by Mr. Hertz, the retiring director, the choice was made by Tide Water.
Furthermore, the transaction which gave rise to these profits was one with which Mr. Thomas had no connection whatever.
The Investment Committee of Lehman Brothers of which he was not a member, reading in the Wall Street Journal of the fact that Tide Water propose to have an exchange of common stock for preferred stock, decided to buy some of the common stock with the objective of exchanging it and selling the preferred stock to institutional investors.
It's found that no confidential information was passed on by Thomas to his partners, that he had nothing to do with the decision to enter into this transaction and did not know of it until the purchases began and, as soon as he learned of it, he disassociated himself entirely from the transaction.
So that, the case before the Court involves none of the evils at which this statute was aimed.
Justice Charles E. Whittaker: May I ask you, Mr. Seymour, are those findings challenged here in any way by either the Government or Blau?
Mr. Whitney North Seymour: Well, I don't know quite how to answer you, Mr. Justice.
The petitioner pays no attention whatever to the findings and quotes from the record sometimes correctly and sometimes incorrectly without regard to the findings.
The Commission says that some of the findings include conclusions, and they're not finding on the court, although the conclusions that they refer to include the alleged conclusion that there was no deputies -- deputization and now they accept that finding.
Justice Charles E. Whittaker: I don't know what that means.
Mr. Whitney North Seymour: Well, I don't either.
Justice Charles E. Whittaker: Can you enlighten us?
Mr. Whitney North Seymour: I don't either.
May I come to that because, at the end of my argument, I want to discuss the Learned Hand dictum in the Rattner case?
Justice William O. Douglas: At this point, Mister, can I ask you a question?
Of course, this whole scheme, 16 (a) and 16 (b), is pretty arbitrary in many respects --
Mr. Whitney North Seymour: Yes.
Justice William O. Douglas: Starting it off at 9.9% and so on.
In terms of the body of law, either at the administrative level or at the Court level, is it necessary to show that -- to prove that the inside information was used?
Isn't there or is there a presumption or a conclusive presumption?
Mr. Whitney North Seymour: There's a conclusive presumption under the statute that if you got the right person, if you're suing the right person, if he's a director or an officer or a 10%-stockholder and he made short-swing profits, he's liable without regard to whether there was any use of confidential information.
The reason I mentioned the finding --
Justice William O. Douglas: Even though he got the -- made the purchase as a result of a ouija boards?
Mr. Whitney North Seymour: Right, but the reason I mentioned it is to satisfy the Court that this is not a case where they should extend the statute, unless the statute requires extension by its plain terms.
Justice Charles E. Whittaker: Are we deciding, if I'm quite clear of my thinking, that even though Mr. Thomas is the new director and he had inside information in the past, he makes a deal or one is made by his agents or his principals, that it's tainted only to the extent of his participation?
Mr. Whitney North Seymour: Well, when you say his principals, I think you get into a problem of whether or not there was a particular circumstance which should give rise to some liability on an agency theory.
We don't have anything of that kind here.
Justice Charles E. Whittaker: Even though it was as a general partnership?
Mr. Whitney North Seymour: It's a general partnership and the partner is the agent of the partnership for certain partnership purposes, but not, I submit, as a director of a corporation.
Justice Charles E. Whittaker: That gets back to these findings?
Mr. Whitney North Seymour: Yes, yes.
And the findings are that he was not a representative of Lehman Brothers, not a deputy of Lehman Brothers as a director.
He was not chosen that way.
Justice Charles E. Whittaker: Are you going to discuss that later when you get there?
Mr. Whitney North Seymour: I am.
Now, counsel for the Commission, I submit, is quite right in saying that the only way liability can be imposed on Lehman Brothers is to treat it as a director, and I want to say a few words about why that could not be done.
First, it's very odd indeed, whatever body of federal corporate law there may be, to treat a partnership for any purpose as a director and so we start with a proposition that it's a very odd result.
And then, you look at the statute, Section 7 -- subdivision 7 of Section 3 (a), appearing at page 2 of our brief and we find this definition.
The term “director” means any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated.
So, to make Lehman Brothers a -- or its other partners a director, would require proof that they were performing similar functions with respect to Tide Water.
Now, there's no such proof in this record.
There's the kind of proof, one would think, that would be required to accomplish even that rather odd result would be proof that the director was, in effect, the dummy director carrying out instructions or at least consulting as to corporate decisions with those whom he was representing.
Now, there's nothing of that kind in this record.
There's absolutely no basis for concluding that Lehman Brothers was performing -- or any of its other partners were performing any similar function to that of a director and, therefore --
Justice Charles E. Whittaker: Is it part of -- is it part of their business to serve one director?
I hope it's in the record, the statement -- rather, approximately 100 directorates are filled by these partners.
Mr. Whitney North Seymour: Well, it's not --
Justice Charles E. Whittaker: Is that part of their business?
Mr. Whitney North Seymour: It's not quite in the record, I think, if Your Honors pleases.
It's something that counsel, and I believe the Commission, have referred to as something from the Commission's record.
Lehman Brothers are an investment banking firm.
They provide investment banking services.
Their partners served on many Board of Directors and the companies on whose boards they served often have Lehman Brothers do underwriting business for them.
But I submit that that does not make Lehman Brothers a director, and that's the point that's before Your Honors.
Now, it's perfectly clear --
Justice Potter Stewart: Mr. Seymour, is Lehman Brothers all -- are Lehman Brothers also investment advisers?
Mr. Whitney North Seymour: Yes.
Justice Potter Stewart: That's the same.
Mr. Whitney North Seymour: Yes.
Justice Potter Stewart: And the Lehman Corporation is something quite different.
Mr. Whitney North Seymour: That's entirely different, yes.
Justice Potter Stewart: Although it does have the same -- it could mean the same personnel, I suppose.
Mr. Whitney North Seymour: Yes, but it's a quite separate organization.
Now, it's clear from this record that it was Thomas' view that it would've been quite improper for him to discuss with his partners the detail of the corporate business of the corporation of which he was a director and that he did not do so.
Now, counsel on the other side, yesterday, made a brief reference to the legislative history of this provision.
It's clear that it was aimed at eliminating the evil of insider manipulation, but Congress considered quite carefully how to do that.
And, there was a proposal to reach way beyond what the present statute reaches and reach those who got unused confidential information and that proposal was eliminated after consideration of the difficulties of its enforcement.
Now, I don't think it makes any difference whether it was eliminated because of its difficulties or for other reasons.
There was a proposal that, in order to recover, there should be proof and the proof was regarded as a difficulty.
And, if I understand my friend from the Commission, he argues that when Congress eliminates such a provision because of difficulty of enforcement, the court ought to expand the construction of what Congress left where there is no problem of proof.
In other words, expand the area of conclusive presumption because Congress decided it ought not to include a provision where proof was required, and I submit that's an extraordinary result of the elimination by Congress of that provision.
In Rattner, the court considered the legislative history and, on that ground among others, decided that partners had been excluded as a result of the congressional determination.
Now, my friend on the other side says on Mr. Justice Stewart's question I think, suggests this problem, that a partnership ought to be regarded as a director but if, instead of doing business as a partnership, the banking organization decided to do it as a corporation and one of its officers was a director, then all the stockholders would become directors.
Well, that's a pretty extraordinary result.
It's very unusual to have a corporation act as a director and still more unusual to have that kind of an attribution.
But, what about the case of the wife and the brother that Mr. Justice Stewart put yesterday?
If the Court ought to try to remedy an evil here by extending the statute, why not wives and brothers and uncles and everybody else?
They're all the people that Congress excluded, and I submit that there's no stopping.
And, here, Congress passed a penal statute with a conclusive presumption, selected those who were to be liable, and I submit, there's no basis for extending it beyond that.
Justice William O. Douglas: How do you deal with Justice Jackson's opinion in the -- was it the Mosser case?
Mr. Whitney North Seymour: Well, I don't know that I'm prepared to deal with the result.
I don't -- it hasn't been --
Justice William O. Douglas: Well, it was a case, I think, as I remember, that arose under the Bankruptcy Act where a trustee did just -- just that.
Mr. Whitney North Seymour: Well, I'm afraid I would not like to discuss that case with Your Honors (Inaudible) because I'm not prepared to it.
Now, the --
Chief Justice Earl Warren: Mr. Seymour, while we're on that general --
Mr. Whitney North Seymour: Yes?
Chief Justice Earl Warren: -- subject, may I ask this question.
Counsel, yesterday, suggested that in this case, the director-partner did not return to the corporation the share that he would be liable for, but he put it into partnership funds and all the rest of the partners profited from his action, concededly, as in violation of the -- of the law.
Now, there being 100 directors in other corporations, as is suggested, and that each of them does the same thing and that money is always distributed between the partners other than the single one who you concede is liable for his part that, in the end, they're doing exactly what the -- what the law prohibits and all of them, including the director-partner in this case, would be obtaining a benefit.
Mr. Whitney North Seymour: Well, I was planning to come to that in a moment --
Chief Justice Earl Warren: Oh, wait.
Mr. Whitney North Seymour: -- but I'll come to it now, Mr. Chief Justice.
Chief Justice Earl Warren: Do it in your own time.
I'm in no hurry.
Mr. Whitney North Seymour: I'll come to it right now.
Counsel -- Mr. Levy said, in effect, that these waivers were going on all the time and the result of that was that everybody could fill their nest.
Counsel for the Commission indicated that this was a very grave evil that Mr. Robert Lehman and others were always back-scratching in getting money this way, and so on.
Now, there's not anything in this record to sustain anything of that kind.
The only reference to any other waiver is a reference to financing for airlines where, under the CAB, the director is not entitled to participate in underwriting fees, which is a very different thing.
There's no evidence in this record of any general waiver of profits made by insider's transactions.
The only other case that is before the Court, perhaps, is the Rattner case where Mr. Hertz had a profit of some $900.
In this case, the profit of Mr. Thomas was some $3,000 or thereabouts.
And, Mr. Hertz turned over that money to the corporation.
There's no evidence of such general violation and I submit that for a court, in the teeth of these findings or even for counsel in the teeth of these findings, to suggest anything to the contrary is quite wrong.
Furthermore, the SEC has regularly filed with it, monthly, statements of all such transactions and if there was such any horrendous evil, as counsel has suggested to Your Honors, the Commission is charged with the duty of seeking legislation and they should do it.
And, I submit the fact that, since 1952 when Rattner was decided, they have seen no occasion to go to Congress for a relief.
It shows on its face that there's no such evil and the fact is, as I said at the beginning, that in my view, they accepted Rattner and I want to come to that.
Chief Justice Earl Warren: My question was not directed at what was in the record, but we were discussing what such an interpretation would lead to under certain circumstances.
You said suppose it's a husband and wife, suppose it's a brother and a sister, suppose it's some other relationship, and my question was only to this.
Suppose this practice was done, as they say, would that not give some substance to the --
Mr. Whitney North Seymour: I would submit, if Your Honor pleases, that if since 1952, with monthly filings, the Commission is unable to show and the plaintiff was unable to show, having access to the Commission's public records, that there was such any evil, the evil is wholly imaginary and if there is an evil, it's for Congress to cure and not to be cured by distorting the language of the statute.
Now, I want to come --
Justice Tom C. Clark: Mr. Seymour, may I ask you --
Mr. Whitney North Seymour: Yes, sir.
Justice Tom C. Clark: (Inaudible)
Mr. Whitney North Seymour: My recollection is that those paragraphs of the notice to admit which were rejected as an offer of proof by the court below and I don't understand that that's one of the grounds on which certiorari was sought here.
Those paragraphs concern other episodes in which Lehman Brothers' partners became directors of other corporations.
And, the court below correctly rejected that as wholly irrelevant to this case.
Justice Tom C. Clark: I wonder if they have vindicated any scheme (Inaudible) in their argument?
Mr. Whitney North Seymour: I shouldn't -- I don't think so, Your Honor.
Now, as to Rattner, very briefly and I'm almost through.
As I told Your Honors, prior to Rattner, the regulation contemplate -- the regulation published by the Commission contemplated that the partner could file showing the partners -- the partnerships, as investments, or his own investments and the court adopted that regulation as one of the grounds of its decision.
Perhaps I better read the precise regulation to Your Honor because I'm going to read the next one.
This is the regulation that was in effect at the time of Rattner and is taken from the Rattner opinion.
“A partner who is required to report in respect of any equity security owned by the partnership may include in his report the entire amount of such equity security owned by the partnership and state that he has an interest in such equity security by reason of his membership in the partnership without disclosing the extent of such interest, or such partner may file a report only as to that amount of such equity security which represents his proportion of interest in the partnership indicating that the report covers only such interest.”
Now, that was surely a recognition by the Commission of the appropriateness of treating the partner as only “only his own interest” and the Court regarded that as an interpretation of the statute and placed some reliance on it.
Justice Felix Frankfurter: These -- are these merely financial partnerships?
Do they -- would this cover legal partnerships?
Mr. Whitney North Seymour: Well I --
Justice Felix Frankfurter: They are members of the law firm or directors of a corporation?
Mr. Whitney North Seymour: Well, I suppose so.
I suppose so.
Justice Felix Frankfurter: And that is not a unique phenomenon, is it?
Mr. Whitney North Seymour: No, and it's not a unique phenomenon to have a law firm partners as directors of corporations.
Justice Felix Frankfurter: That's what I mean.
Mr. Whitney North Seymour: Now the regulation after Rattner, I submit, really in effect was -- it can be fairly regarded as an adoption of the Commission -- of the principle of the Rattner case or at least an indication that the Commission did not propose to quarrel with them, and the release is -- the release with reference to Rattner is in the brief at page 21, as I refer to the Chief Justice, and that new regulation is stated to be a regulation in the interest of disclosure.
And, the Commission in the contemporaneous release, which has never been withdrawn so far as I know, said it is not intended as a modification of the principles governing liability for short-swing transactions under Section 16 (b) as set forth in the case of Rattner against Lehman.
But it is based upon the belief that full disclosure requires a report of all partnership transactions when an officer, director, or a 10%-stockholder of the issuer is a partner.
Now, I submit that the reason the Commission didn't ask Congress to change the result in Rattner is because they were content with it and were content with it indeed until Judge Clark stirred them up to participate in this case.
And, if they had any quarrel with that decision, if they thought there was any evil, they should have gone to Congress to correct it.
Justice Felix Frankfurter: What was the date of that regulation, Mr. Seymour?
Mr. Whitney North Seymour: That regulation is September -- that release is September 24, 1952.
1952, so that, until the decision of the court below when the Commission first busied itself in getting into this litigation, it did not busy itself about it when Judge Dawson decided the case against the petitioner, but only after the dissent in the court below.
Justice Hugo L. Black: Where is that in your brief?
Mr. Whitney North Seymour: I beg your pardon?
Justice Hugo L. Black: Where is that regulation in your brief?
Mr. Whitney North Seymour: Page 21.
Justice Hugo L. Black: 21?
Mr. Whitney North Seymour: I beg your pardon, page 24.
Justice William O. Douglas: Just as a matter of curiosity, Mr. Seymour.
Mr. Whitney North Seymour: Yes, sir?
Justice William O. Douglas: Your answer to Mr. Justice Frankfurter -- I might have to assume that law firms these days are taking short-swing profits?
Mr. Whitney North Seymour: No, I don't.
Well now, I'm almost through and I'll --
Justice Felix Frankfurter: But -- but would there be any difference in the consideration between a law firm director or all the --
Mr. Whitney North Seymour: I wouldn't think so.
Justice Felix Frankfurter: -- legal, all the legal implications of a partnership, would there be any difference --
Mr. Whitney North Seymour: No.
Justice Felix Frankfurter: -- in a case of a partner, in one of the many various New York law firms who have hold directorship?
Mr. Whitney North Seymour: I wouldn't think so, and the obligations to the corporation and the obligation to the partnership would be the same, I should think.
Justice Hugo L. Black: It doesn't matter to have an effect, either good or bad, I wouldn't say --
Mr. Whitney North Seymour: Yes, but I --
Justice Hugo L. Black: But I can assume I can (Inaudible)
Mr. Whitney North Seymour: I think -- I think the Bar would be very much surprised to learn that it had an obligation, as Mr. Levy suggested, to disclose to the partners everything that any member of a Board learn as a director.
Justice Felix Frankfurter: But --
Mr. Whitney North Seymour: -- and there's no such basis -- no basis to furnish those things.
Justice Felix Frankfurter: The suggestion was it would be his duty --
Mr. Whitney North Seymour: Yes.
Justice Felix Frankfurter: That all partnership -- all firm-partnership business.
Mr. Whitney North Seymour: Perfectly obvious and I -- I should submit --
Justice Felix Frankfurter: I didn't mean to --
Mr. Whitney North Seymour: -- that that isn't so.
Justice William O. Douglas: Well, a partner -- law partners, I assume, keep the $50-fee for directors and they keep it themselves, so the --
Mr. Whitney North Seymour: Mr. Justice, you're a survivor of a day which is a happier day.
Justice Felix Frankfurter: Mr. Seymour, that was (Inaudible) element in view of Justice Black's interventions, I hope I did not imply that I regard that as the most desirable aspects of their legal profession.
Mr. Whitney North Seymour: No, I --
Justice Felix Frankfurter: I didn't mean to make any such implications.
Mr. Whitney North Seymour: I think, in view of --
Justice Felix Frankfurter: If it's irrelevant to say something, I could.
Mr. Whitney North Seymour: I think, in view of a number of stockholder suits in the last 25 years, most lawyers would feel that way, too.
Justice Felix Frankfurter: Yes.
Mr. Whitney North Seymour: Now finally, there are references in the briefs to Judge Medina's decision in the banker's case, a very long opinion in which he deals with various aspects of banking in New York and petitioner seeks to incorporate by reference some of the things in that opinion and this case as if they've been proved in this record, and Judge Medina correctly said below that that was irrelevant to anything here.
They refer to a CAB statute and the fact that, under the CAB statute, a Lehman Brothers partner has, for certain purposes, been regarded as a representative of the partnership.
Now, this merely points out the fact that when Congress wanted to use a word to describe something, it knew how to do it and if it wanted to include partners or representatives or anything of that kind, there are statutes in our brief which show that they could do it.
Justice Felix Frankfurter: This is as such that at all.
Mr. Whitney North Seymour: Such, of course, doesn't do anything except to refer to 16 (a) and it doesn't expand the group as I think Mr. Justice Douglas pointed out in the question he asked.
Justice Hugo L. Black: You may have said, a moment ago, just so -- I'm sorry, I didn't understand.
Have this regulation on page 24 ever been expressly revoked by the Commission?
Mr. Whitney North Seymour: Well, my understanding is that, early in 1961, the Commission passed over into a series of instructions about the filing of reports and, whether that resulted in a revocation, I'm not quite sure.
Justice Felix Frankfurter: Are those instructions in conflict with this regulation?
Mr. Whitney North Seymour: No, sir, I think not.
I think they're in accord with the regulation and there's a reference to them in our brief.
And certainly, down to 1961, when the Commission began to busy itself with this litigation, there wasn't any departure from the principles of those regulations in anything I know of that the Commission said it did.
Unknown Speaker: (Inaudible)
Mr. Whitney North Seymour: I beg your pardon?
Unknown Speaker: (Inaudible)
Mr. Whitney North Seymour: It was a release in connection with the regulation which, I take it, states the basis on which the regulation was made.
And I take it, it's an explication of the regulation.
Certainly, it's an official act of the Commission.
Now, my friend Mr. Levy has reserved a rather more than usual time for rebuttal, and I want to anticipate two points which he may refer to on rebuttal in the course of this extended time of which have not heretofore been mentioned, I think.
First, there was some suggestion in Judge Clark's dissent that maybe the -- Thomas -- Thomas could be held liable for all of Lehman profits, all the other partners' profits because he was a co-owner of partnership property.
Now, I don't think we need to get into the complication of partnership law here, but it's perfectly clear that there's a distinction between ownership in specific property and an interest in the partnership and the partner, under the Uniform Partnership Act which is in effect in New York, is a co-owner of specific partnership property but he can't dispose of it.
It is not subject to the claims of his creditors and obviously, the profits of the partnership are not on that category -- they're in the category of interest in the partnership.
And, his interest in the partnership is his right to share in the profits.
The statute refers to profits realized by him.
It cannot refer then to something that he couldn't possibly deal with.
It must be when the profit has been realized by him.
Second, Mr. Justice Whittaker, I want to come to the deputization point which you and Mr. Justice Douglas asked me about.
In the concurring opinion in Rattner, Judge Learned Hand, recognizing that, in the circumstances of that case, there wasn't any possible ground for holding Lehman Brothers reserved for a future consideration the situation which might exist if there was deputization of a director to represent the partnership interest, and he didn't define what he meant by that at all.
The court below, Judge Medina and Judge Swan, said there wasn't any room in this statute for any conception -- such conception as that.
The statue doesn't refer to deputies, but the directors, officers, and stockholders.
But there's a specific finding of fact by both court below that there wasn't any deputization.
So whatever it means, it didn't exist here.
Now, I suppose, what it must mean, if the doctrine is over, is a case where a stockholder designates somebody to represent him on the Board and directs his conduct in that event.
Judge Hand suggests that you might get a different result.
I don't see any basis for it under the statute but, in any event, that was not the situation here and that's dispositive of the -- of the case on that point.
Now, I submit, the --
Justice John M. Harlan: The judgment against Thomas is not involved here.
Mr. Whitney North Seymour: No, sir.
The judgment against Thomas --
Justice John M. Harlan: Swan dissented on -- Judge Swan dissented.
Mr. Whitney North Seymour: Yes, Judge Swann thought that the judgment was somewhat larger than it should've been and we haven't sought certiorari.
I have just one other point.
The court below denied interest.
Both courts below denied interest upon the ground that Thomas was being charged more than he actually realized by way of profit and the question was a difficult one, and fairness did not require that interest should be imposed, we think that was right.
Chief Justice Earl Warren: Mr. Levy.
Argument of Morris J. Levy
Mr. Morris J. Levy: Mr. Chief Justice and may it please the Court.
The question, as I see it here -- the issue, as I see it here, is the interpretation which this Court must give to a statutory purpose and inherent in the Act.
Congress specifically stated that the purpose of the Act was to prevent the use of inside information in specifying the three categories of persons who are in such relationship to an issuer.
That they would, in the course or the nature of their duties, have access to inside information.
Congress, by no means, meant merely to stupefy or merely to limit the liability under that section to those three types of persons mentioned.
It would seem from the purpose -- from the statutory purpose that any person who has access, who was so close to the issuer, that he would have access to inside information would be one of those persons against whom the statute would apply.
Now, I believe that a partnership, a member of which is on the Board of an issuer, who deals in securities of the issuer and who is, in the nature -- in the very nature of its business, an investment adviser to the issuer is in such close relationship to the issuer that it must be deemed as a person who has access to confidential information and against whom the statute was meant to apply.
This Court has on several occasions held that it would not -- it will not be limited by the literal statutory words of a statute but will apply the statute even beyond its literal wording in order to accomplish the purpose which Congress intended.
I specifically refer Your Honors to the cases of the United States against American Trucking Association where this Court held that there is, of course, no more persuasive evidence of the purpose of the statute than the words by which the legislature undertook to give expression to its wishes.
Often, these words are sufficient in and of themselves to determine the purpose of the legislation.
In such cases, we have followed their plain meaning when --
Justice Felix Frankfurter: Do you mean?
Mr. Morris J. Levy: -- that meaning --
Justice Felix Frankfurter: Do you mean --
Mr. Morris J. Levy: Has led --
Justice Felix Frankfurter: I beg your pardon.
Mr. Morris J. Levy: Sorry.
Justice Felix Frankfurter: I'm sorry.
Mr. Morris J. Levy: -- when that meaning has led to absurd or futile results.
However, this Court has looked beyond the words to the purpose of the Act.
Frequently, however, even when the plain meaning did not produce absurd results, but merely an unreasonable one.
Plainly at variance with a policy of the legislation as a whole, this Court has followed that purpose, rather than the literal words.
I say to Your Honor that the accomplishments of the statutory purpose can only be effectuated by holding in this case a partnership liable for its short-swing transactions because of the fact that one of its members is a director of the issuer, has -- definitely has access to inside information and, apart from which, the partnership itself because of the nature of its business with the issuer also has the same access to inside information.
Justice John M. Harlan: Would your argument apply to a limited partner?
Mr. Morris J. Levy: I'd say, Your Honor, that it would apply to a limited partner.
Justice John M. Harlan: Even though he had no interest in the profits of the firm, that they it might represent the (Inaudible)?
Mr. Morris J. Levy: Well, I'm assuming, Your Honor, that the same facts -- you're also giving me the same facts with respect to the partnership.
Now, the partnership is also an investment adviser to the issuer.
Justice John M. Harlan: But the limited partner is excluded from -- the limited partner-director is excluded from all such business under the terms of its limited partnership.
Mr. Morris J. Levy: I --
Justice John M. Harlan: Would you even carry that far?
Mr. Morris J. Levy: I'd say that the close relationship of a limited partner to the rest of his partners would seem that -- to make him liable or to make his partnership firm liable for any profits realized by the firm.
But I say, in this case, we don't have to come to that.
I say, Your Honors, that the court below -- the trial court below found as a fact that there was no deputation of Mr. Thomas by Lehman Brothers.
I can't see how as a legal conclusion, the court could have made such finding.
Here we have a person who is a member of a partnership, Mr. Hertz, who testified that he joined the firm of Lehman Brothers to bring his business, that he joined Tide Water for the purpose of bringing business to Lehman Brothers -- the Tide Water business to Lehman Brothers, that he recommended Mr. Thomas -- that he asked Mr. Thomas whether he wished to be a member of the Tide Water Board and that his purpose of asking him whether he wanted to be a member was to -- for him to further the interest of Lehman Brothers, that pursuant to his recommendation which was tantamount to I suppose an order since Mr. Hertz had been a director of Tide Water for approximately 20 years and he was sort of the elder statesman there, and in view of the fact that Lehman Brothers was the financial adviser to Tide Water, how there could be a legal finding that Lehman Brothers did not deputize Mr. Thomas to be -- to represent its interest on the Board.
It's most difficult to see Judge Clark in his dissenting opinion.
Justice Charles E. Whittaker: May I ask you, please sir, at that point, what interest did Lehman Brothers have in Tide Water to be represented at the time that the (Inaudible)?
Mr. Morris J. Levy: The only interest it had at that time was that they were getting the business from Tide Water in the financing.
Justice Charles E. Whittaker: But, they bought this certain types of shares of stock afterwards?
Mr. Morris J. Levy: Afterwards, yes, sir.
And then, it's also interesting to note, Your Honor, that in a testimony of Mr. Thomas, he testified that at the time prior to his joining the Tide Water Board, he owned approximately 4,000 shares of stock in Monterey Oil which he claimed was a competing company.
And that in order for him to take his job with Tide Water, he promised to give up his directorship in Monterey, although he stated he didn't own one share of stock in Tide Water which apparently assumes that here's a person giving up a directorship in a company which he has a large investment to take a directorship in a company in which he has no investment whatsoever.
That was only done for the purpose of representing Lehman Brothers.
In fact, Lehman -- he was deputized by Lehman Brothers to do that.
Justice John M. Harlan: Do you -- do you con -- do you attack the findings of the two lower courts?
Mr. Morris J. Levy: I certainly do, Your Honor.
I say, the legal conclusion, the finding was wrong, and Judge Clark apparently sides with me and says that the lily was gilded.
He couldn't see how -- how the court could find that there was no deputation there.
Justice John M. Harlan: This is sort of a secondary argument.
In other words, your basic position is consistent with accepting the fact, do you not?
Mr. Morris J. Levy: My basic position is -- well, actually, my basic position is -- it's two things.
It is that the partnership in general, as a legal proposition, should be held liable apart from any deputation but that there was deputation there.
Justice John M. Harlan: I just wanted to make it clear or --
Mr. Morris J. Levy: Yes.
Justice John M. Harlan: -- myself clear.
Your basic position is the same as the Commission, is it not?
They say they accept the findings and (Inaudible) that it should've been in the judgment against the partnership.
Mr. Morris J. Levy: Well, I differ from the Commission, Your Honor, and that I do not accept the findings, respectfully so, of the courts below that there was no deputation.
Justice Felix Frankfurter: Mr. Levy, “the lily was gilded,” is that a conclu -- a finding of facts?
Mr. Morris J. Levy: No, that's a conclusion by Judge Clark from the evidence.
He found that -- he felt that the -- there was deputation that there couldn't be anything but -- anything else but deputation from the facts and he couldn't understand how a court could find otherwise.
Justice Felix Frankfurter: That's frequently the fate of people who disagree with the majority, I know that very well.
Justice John M. Harlan: Well, what I'm trying to get at is, if your attack on the findings is rejected, the findings of two courts are rejected, are you still in the Court with all your concerns?
Mr. Morris J. Levy: Yes, sir.
Justice William J. Brennan: In the Court here?
Mr. Morris J. Levy: Yes, sir.
Justice William J. Brennan: That's what I wanted to get at.
Mr. Morris J. Levy: Yes, sir.
I maintain with the Commission that the partnerships must be held liable (Voice Overlap) under the interpretation.
Justice John M. Harlan: I understood.
Mr. Morris J. Levy: Now, if we go to the --
Justice Felix Frankfurter: Because it is a director.
Mr. Morris J. Levy: I beg your pardon, sir?
Justice Felix Frankfurter: Because it is “a director” under 16 (b), which is it --
Mr. Morris J. Levy: Because --
Justice Felix Frankfurter: Is it a beneficial owner?
Is it a director?
Is it an officer by reason of his relationship to the issuer?
Which one, or as I gather from your argument, though I for myself think most abstract discussions of statutory construction and not very profitable, but I gather in your argument, it was that the purpose behind this provision is so important to the public interest as disclosed by the disclosure preceding its enactment that the condemnation and the right to sue under the statute isn't restricted to those three categories.
Mr. Morris J. Levy: Precisely, Your Honor.
Justice Felix Frankfurter: That's your point?
Mr. Morris J. Levy: That's my point.
Justice Felix Frankfurter: But it isn't restricted to what the statute as --
Mr. Morris J. Levy: That's right.
Justice Felix Frankfurter: -- as classified?
Mr. Morris J. Levy: That's exactly what I meant to say and I hope I have made my argument clear with respect to that.
I say it's not restricted to only those three mentioned that Congress never intended to restrict that merely by mentioning it.
They didn't say that it shall only apply to a director or officer, but they said for the purpose of preventing the unfair use of information.
Any profits realized by a director, because a director, officer, or 10%-stockholder, by reason of his relationship to the issuer, because he had access to information, should be recoverable.
Justice Charles E. Whittaker: Well, are you arguing that remedy here is controlled by something other than that statute?
Mr. Morris J. Levy: No, I say the remedy, Your Honor, if this statute is not, as Mr. Seymour stated, a penal statute, it is a remedial statute.
All the courts have so held the statute from the history to be a remedial statute, and that the courts must apply its operation to the facts in such a way that it will carry out the very purpose which Congress intended to be carried out and, on -- that, unless that is done, the statute will actually fall by the wayside and have no usefulness whatsoever.
Justice Charles E. Whittaker: Does this statute allow to create a remedy conversely against anyone other than the beneficial partner, officer, or director of the issuer?
Mr. Morris J. Levy: Yes, sir.
In my opinion, Your Honor, the statute creates a right against a person whose relationship to the issuer is such that he may have access to inside information.
The very essence of the statute is access to inside information so that he isn't able to use such information.
That is the very evil against which the statute is aimed.
Justice Charles E. Whittaker: Wasn't this to say you should be liable for the profit realized by him?
Mr. Morris J. Levy: That is correct, sir.
Justice Charles E. Whittaker: Well then, does that mean by him and somebody else?
Mr. Morris J. Levy: No, realized by him, specifying those three types of persons who fall within the category of persons who have access to inside information, but not excluding -- not excluding anybody who can be proved to be in such relationship to the issuer that he has indeed such access to inside information.
I believe that, in this particular case, we have actually proven that there was inside information transmitted to the partnership by the partners.
Justice John M. Harlan: Which you've got the hurdles of -- the findings of facts which were against you on that.
Mr. Morris J. Levy: Well, I say we have two -- two ways to hold the partnership and that is, one, to actually carry out the congressional purpose and we say that Congress stated that anybody who has access to inside information is in such relationship to the issuer that he has access to such information shall be held liable, or we can go on the proposition that there was deputation.
Now, if Your Honors find that the conclusions of the court below, there was -- that there was no deputation, of course, I'd want to proceed on the theory that the purpose of Congress must be carried out and that the only it can be carried out is by holding the partnership liable for the profits because a director, a member of its firm, is a partner -- is a director.
Now, going to the partner himself, to Thomas himself, we need not go beyond the reaches of the statute in his case.
He was a director.
There was no doubt.
There's no doubt of that.
The statute reaches him.
Now, why should his profits be limited to a proportionate partnership interest?
In order to carry out the purposes of the statute, this Court would not have to go beyond the literal meaning of the words but, actually, by holding him liable for the entire profits, the congressional purpose would be carried out in this fashion.
Of course, if he and his partnership were held liable jointly and severally, I think that would be -- that should be -- that should be the congressional -- it should be the attitude of the court in carrying out the purpose of Congress, but if the court sees fit not to hold the partnership, I say only by holding the partner himself for the entire profits can the congressional purpose be carried out in this case and, by doing so, this Court would not have to go beyond the very reaches or literal language of the statute.
Justice John M. Harlan: What do you do with “realized”?
Mr. Morris J. Levy: Well, as --
Justice John M. Harlan: Profit realized?
Mr. Morris J. Levy: As an owner, as a co-owner of the partnership funds, the partnership realized -- realized the profits.
Justice John M. Harlan: It was realized by him.
Mr. Morris J. Levy: Well, realized by him.
“By his partnership” is him, too.
I say that his partnership is him.
He and his partnership are one and the same.
He cannot be disassociated from his partnership.
Justice Charles E. Whittaker: Is it the law -- under your partnership law, this is something that's -- the theory that each partner owns it all and he belongs to the (Inaudible)
Mr. Morris J. Levy: I believe, Your Honor, if I'm not mistaken, that each partner has an indivisible interest in common with the other partners, if I'm not mistaken.
That is the law.
Justice Potter Stewart: Co-owner.
Mr. Morris J. Levy: Now, Mr. Seymour has made some statement here with respect to certain of the facts with respect to waiver not being properly set forth.
Now, I refer Your Honors to pages 126 and 127 of the record in which Mr. Thomas specifically testified that there had been cases where his partners have waived -- 125 and 126 of the record.
We have had a number of transactions, and I'm quoting, “In which other partners have waived their interests of short-swing profits.”
There were the facts which indicate that there had been other cases.
It's in the record.
Chief Justice Earl Warren: Waived in favor of the other partners?
Mr. Morris J. Levy: In favor of the other partners in other -- other corporations.
Justice Felix Frankfurter: What page are you reading?
Mr. Morris J. Levy: Page 125 to 126 of the record.
Justice Felix Frankfurter: What is that?
Mr. Morris J. Levy: I beg your pardon?
Justice Felix Frankfurter: 25 (a) -- 125?
Mr. Morris J. Levy: Yes.
Justice Felix Frankfurter: What is that, an offer of proof?
Mr. Morris J. Levy: No, 125 (a) and 125 -- 126 (a).
That was an -- that was not an offer of proof.
It was actually testimony by Mr. Thomas in which he was asked --
Justice John M. Harlan: You said that the question is, “It couldn't be possible?”
And he said, “Yes, it couldn't be possible.”
And then, he ends up and says, “Yes, it occurred right here.”
So, you end up saying that this meant -- there's nothing in this record that, so far as testimony is concerned, except this transaction.
Mr. Morris J. Levy: Well, no, I refer Your Honor prior to that.
My question was -- I started with “now,” and he answered “I might tell you, Mr. Levy, that we have had a number of transactions in which other partners waived their interest, primarily CAB Financing whereby a lawyer can't participate.”
Now, question, “Were a partner in Lehman Brothers waives his interest in a transaction, is that partner's interest distributed amongst the other partners?”
Answer, “It is to my understanding, yes.”
Then, of course --
Justice John M. Harlan: That's a different kind of a transaction than the one that you're referring to at the bottom.
Mr. Morris J. Levy: That is --
Justice John M. Harlan: (Inaudible)
Mr. Morris J. Levy: That is true, Your Honor, except that he specifically stated cab financing primarily, not excluding other transactions, he did not exclude other transactions and said -- and say they're limiting it to cash transactions.
Justice Felix Frankfurter: Did you pursue that question and asked -- did you pursue that question and make clear that you had other specific transactions in mind and get his views on them or his testimony regarding it?
Mr. Morris J. Levy: I don't believe I did pursue that, Your Honor.
Chief Justice Earl Warren: Very well.